Business

China raises bank reserves to cool inflation

  • 18 February 2011
  • From the section Business
China gridlocked cars
Image caption The Chinese economy is booming despite measures to cool growth

China has raised the reserve requirement for banks by 0.5% in its latest attempt to curb inflation.

By insisting the banks hold more cash, the central bank hopes to restrict lending, thereby reducing spending.

The bank has already raised capital requirements once this year, following a number of hikes last year, and has raised interest rates three times in the past four months.

Inflation in China, now the world's second biggest economy, is at 4.9%.

High levels of lending helped China through the global downturn and contributed to the economy's 10.3% growth last year.

However, concerns about the economy overheating and price rises causing unrest, as they have done in the past, mean the government and central bank are now keen to clamp down on lending.

"It's indicative of a greater sense of policy urgency out of Beijing in the last few months, in response to this concerning pick-up in inflation," said Brian Jackson at the Royal Bank of Canada.

"They're using every policy tool at their disposal, and that's all they can do. They were a little bit slow to get moving on the monetary policy tools and now they're playing a bit of catch-up."

The measures taken so far have had little effect, with the rate of inflation rising in January and economic growth picking up in the final three months of last year.

Analysts, therefore, expect further measures in the coming months.

"We think there is more to come in terms of reserve requirements and higher rates," said Adam Cole at RBC Capital Markets.

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