The People's Bank of China (PBOC), the central bank, announced on Tuesday an increase of the deposit reserve requirement ratio, which analysts translated as a move to manage inflationary expectations and avoid recurrence of lending boom.

The PBOC decided to raise the deposit reserve requirement ratio by 0.5 percentage points from January 18 this year. The ratio at small financial institutions such as the rural credit cooperatives would remain unchanged to support the agriculture sector.

This is the first time that the PBOC adjusted the ratio of deposit that lenders are required to set aside since the end of 2008 and the first increase for the ratio since June of 2008.

The PBOC has cut the bank reserve requirement ratio for four times in the second half of 2008 to stimulate growth as the global financial crisis started to weigh on the economy.

The adjustment of reserve requirement ratio, without changing the benchmark interest rates, indicated the central bank was targeting at inflationary expectations instead of inflation, said Zhao Qingming, a senior researcher at the China Construction Bank.

The increase of 0.5 percentage points in reserve requirement ratio would help freeze 250 billion yuan ($36.6 billion) of liquidity, sending a strong signal of policy shift by the central bank, said Chen Yong, a senior researcher with the Huatai United Securities.

The move, much earlier than market expects, also implied the December consumer price index (CPI), a main gauge of inflation, was most likely to increase at a pace much higher than expected, Chen said.

The National Bureau of Statistics was expected to release major economic data for December and the whole year of 2009, including gross domestic product, CPI, industrial output and fixed assets investment, next week.

Zhuang Jian, a senior economist with the Asian Development Bank, said the adjustment did not indicate a shift in the moderately easy monetary policy, but an effort to control the pace of lending.

The adjustment came after media reports saying that the country's banks extended 600 billion yuan of loans between Jan. 4 and 8. The reports sparked new concerns about a lending boom. However, there was no confirmation from the central bank on the figure as of Tuesday.

Through the reserve requirement ratio increase, the central bank intended to urge for a balanced lending at commercial banks, which would support economic growth while avoid higher inflationary expectations, Zhuang said.

To help the national economy counter the adverse impacts of the global financial crisis, China's banks extended a record amount of loans, 9.21 trillion yuan, in the first 11 months of last year. This was 5.06 trillion yuan more than the corresponding period of 2008 and far exceeding the government target of 5 trillion yuan for the whole 2009.

The central bank and the country's policy makers have repeatedly stated that the government would maintain the continuity and stability of macroeconomic policy and continue the proactive fiscal policy and moderately easy monetary policy in 2010. But it would enhance the focus and flexibility of macroeconomic policy this year according to emerging situations.

(Xinhua News Agency January 12, 2010)