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ECONOMY
Weekly Watch> WEEKLY WATCH NO. 13, 2011> ECONOMY
UPDATED: March 25, 2011 NO. 13 MARCH 31, 2011
Liquidity Squeeze
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The People's Bank of China, the central bank, on March 18 announced it will increase the reserve requirement ratio by another 0.5 percentage points in a move to siphon excess liquidity from the market. It was the third hike this year after six increases in 2010.

Effective on March 25, large commercial banks must set aside 20 percent of their deposits in reserve, locking down nearly 360 billion yuan ($54.8 billion) that they could otherwise lend.

In the wake of proliferating inflationary fears, China has vowed to take a prudent monetary stance this year. The central bank has soaked up liquidity through a series of market operations and required commercial banks to slow their pace of lending.

"The aggressive move is beyond market expectations since the problem of excessive liquidly has obviously abated," said Zhu Baoliang, chief economist at the State Information Center. "The growth of money supplies is already tapering off this year."

The policymakers may be concerned about the ripple effect of massive monetary expansion in Japan, he said.

"This is clear evidence that the tightening agenda is still alive in China and signals that when nerves have settled, we will get more interest rate hikes," said Stephen Green, a Shanghai-based economist for Standard Chartered Bank.

China may continue to rely on the reserve requirement ratio to fine-tune its monetary environment since there is less room for interest rate adjustments and currency policies, said Wang Qing, chief economist for Greater China of Morgan Stanley.



 
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