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ECONOMY
Weekly Watch> WEEKLY WATCH NO. 51, 2010> ECONOMY
UPDATED: December 17, 2010 NO. 51 DECEMBER 23, 2010
Draining Liquidity
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The People's Bank of China on December 10 ordered the third increase of the reserve requirement ratio (RRR) for banks in a month in a move to siphon excess liquidity that has been fueling inflationary jitters. This was the fifth such hike this year.

Effective as of December 20, commercial banks will have to set aside an additional 0.5 percent of their deposits in reserve, locking about 350 billion yuan ($52.7 billion) that they could otherwise lend.

The hike will also put flesh on the bones of the government's recent pledge to switch the "moderately loose" monetary policy to a "prudent" stance.

Although the central bank felt the need to do something to show its determination to tame inflation, it had no intention of killing growth with an aggressive interest rate hike or imposing a lending squeeze, said Lu Ting, an economist at the Bank of America-Merrill Lynch.

"Hiking RRR seems to be the natural choice of the central bank. China wishes to maintain the current pace of growth," he said.

"There are underlying concerns that growth below 8 percent will not be able to generate enough jobs for new entrants into workforce. So that's a big dilemma for the government," Steven Dunaway, adjunct senior fellow for International Economics at the Council on Foreign Relations, told Beijing Review.



 
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