Bank reserve requirement ratio ups 50 basis points

Xinhua, May 12, 2011

China's central bank announced Thursday that it will raise the reserve requirement ratio (RRR) of the country's lenders by 50 basis points from May 18, the fifth such rise this year.

The move will lift the RRR for China's large financial institutions to a record high of 21 percent, meaning they will have to lock up 21 percent of their deposits as reserves.

The tightening measure came shortly after the government announced on Wednesday that China's consumer price index (CPI), a main gauge of inflation, rose 5.3 percent in April from a year ago, slightly down from March's 32-month high of 5.4 percent.

China has also raised the benchmark interest rates four times since last October, in an effort to fight rising prices.

Liu Dezhong, chief economist with Minmentals Securities, said the RRR hike was "within market expectation" due to April's 11.43 billion U.S. dollar trade surplus and persistent inflation.

"The April CPI remains stubbornly high. Besides, the rising price trend is starting to influence non-food products," he said.

Expectations of further policy tightenings caused the stock market to dive on Thursday, with the benchmark Shanghai Composite Index slumping 1.36 percent, or 39.34 points, to 2,844.08.

Li Huiyong, a chief macroeconomic analyst for Shenyin & Wanguo Securities, said the RRR hike could help the central bank further drain market liquidity, and he expects another hike in June.

The rise in the RRR is likely to freeze about 370 billion yuan (about 56.92 billion U.S. dollars) in market liquidity.