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ECONOMY
Weekly Watch> WEEKLY WATCH NO. 48, 2010> ECONOMY
UPDATED: November 26, 2010 NO. 48 DECEMBER 2, 2010
Mopping up Liquidity
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The People's Bank of China (PBOC), the central bank, on November 19 issued an order raising the reserve requirement ratio (RRR) by 0.5 percentage points, effective as of November 29. This is the fifth such hike this year and the second increase in November. It is expected to freeze liquidity worth around 300 billion yuan ($45.2 billion).

The central bank said the move was intended to "enhance liquidity management and moderately regulate credit supply."

By mopping up excess liquidity, the government is trying to fend off the ripple effect of the U.S. quantitative easing policy that may fuel inflation and asset bubbles in emerging markets, said Fan Gang, Director of the National Economic Research Institute.

China's consumer price index (CPI), a barometer of inflation, hit a 24-month high of 4.4 percent in October. In a recent report, UBS Securities expected China's CPI to surge to 5 percent in November and then level off in December.

"Given the nature of CPI inflation so far, we think the sequential momentum of food price increases may be near its peak," said Wang Tao, an economist at UBS Securities. "Unless there is unusually bad weather or any natural disasters, we expect the year-on-year CPI inflation to stabilize in the next few months and stay in a moderate range in early summer 2011."

"The PBOC is under pressure, and it needs to do something to show its determination to tame inflation. However, it has no intention to kill growth by aggressively hiking interest rates or imposing a lending squeeze," said Lu Ting, China economist at the Bank of America-Merrill Lynch.

Compared with interest rate increases, the RRR rise has a more direct impact on the excess liquidity, and more such increases are probably already in the pipeline, said Zuo Xiaolei, chief economist at the China Galaxy Securities Co. Ltd.

Tan Yaling, a senior analyst at the Bank of China Ltd., said China is less likely to raise the interest rate in the near future as bigger interest rate differences between China and other major economies would quicken inflows of hot money.



 
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