China's central bank on Saturday raised the proportion of deposits that banks must hold in reserve for the eighth time this year, extending a campaign to prevent the world's fourth-largest economy from overheating.
The half-point increase in the reserve requirement ratio, which will take effect on October 25, brings the ratio for big banks to 13 percent - matching the record rate that was in effect from September 1988 to March 1998.
The People's Bank of China (PBOC) said that the move, which comes a day after data that showed an unexpectedly strong expansion in money supply and lending, was meant to "strengthen management over liquidity in the banking system and prevent money supply and credit from growing too quickly".
Annual growth in the broad M2 measure of money supply accelerated to 18.5 percent in September from 18.1 percent in August. The stock of yuan-denominated loans rose 17.1 percent, up from August's 17.0 percent. Seeking to keep such growth in check, the central bank has now increased banks' required reserves eight times and interest rates five times so far this year.
"It seems that the Fed's recent rate cut restricts China's space for raising interest rates," said Lin Zhaohui, an analyst with Guotai Junan Securities in Shanghai, referring to the US Federal Reserve's 50 basis point cut in September.
"Over the next few months, we will probably see the People's Bank of China relying more on measures to control the amount of liquidity rather than the price of money."
The central bank, seeking to discourage inflows of speculative capital betting on appreciation of the yuan, seeks to maintain a gap between domestic and US interest rates so as to minimise the potential gains of punting on the Chinese currency.
The announcement may come as a surprise to some economists, many of whom had not expected the central bank to take further tightening measures ahead of the Communist Party's five-yearly Congress, due to open on Monday.
Lin said the central bank probably felt compelled to tighten in part because roughly 400 billion yuan in bills are due to mature this month, potentially flooding the financial system with cash. He estimated that the latest move would soak up about 170 billion yuan ($22.6 billion) that banks would otherwise have available to lend out to customers.
Beijing's moves - which stand in contrast to many Western central banks' recent efforts to offset the impact of the US housing crisis-induced credit squeeze - reflect the vastly different challenges it faces.
Instead of a lack of cash, Beijing is struggling to cope with a flood of liquidity that pours the country every month as a result of its growing trade surplus and investment inflows - threatening to drive up prices for goods and assets.
The trade surplus hit $23.9 billion in September, bringing the figure for the first nine months to $185.7 billion - more than all of last year combined. Meanwhile, the country's main stock index, the Shanghai Composite, has more than doubled so far this year and annual consumer inflation hit a more than decade high of 6.5 percent in August.