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By Zhou Xin and Kevin Yao
December 10, 2010 1:00 PM EST
China's central bank on Friday raised the amount of money that lenders must keep on reserve for the third time in one month, following a spate of robust data that raised the case for policy tightening.
The latest step to raise the reserve requirement ratio (RRR), aimed at mopping up excess cash in the economy, had been widely expected after Beijing announced a shift to a "prudent" monetary policy from the previous "moderately loose" stance earlier this month.
The move came after China reported strong trade figures for November, which could fuel fresh criticism of Beijing's exchange rate regime, and before data on Saturday that is expected to show another pick up in inflation, already running at its fastest clip in more than two years.
"There is still much scope for the central bank to raise reserve ratios next year -- we expect several increases in the first quarter of next year and the ratio should reach as high as 23 percent in 2011," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.
"As for whether the central bank will raise interest rates, I think it will largely depend on the CPI figure in the coming months."
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The 50 basis point increase, which takes effect on Dec 20, leaves the reserve requirement ratio at 18.5 percent, a record high for the majority of the country's banks.
China's stock markets could find some comfort in the central bank's decision to raise required reserves, as it could suggest a rise in interest rates could be postponed somewhat.
The country's stock markets have shed more than 10 percent over the past month on concerns that the government would ratchet up its monetary policy tightening in the face of rising inflation.
STRONG DATA
Reflecting the challenge facing policymakers, data on Friday showed China's imports and exports jumped in November, bank lending topped forecasts and property investment powered ahead.
The robust data also offered a double-hit of good news for the global economy: a reminder that Chinese demand was still growing apace and an indication that the U.S. and European recoveries were picking up steam.
China has been slow to tighten monetary policy this year, partly for fear of a double-dip recession in the developed world where the United States and Europe are struggling to recover from the global economic crisis.
With inflation running at its fastest clip in more than two years, analysts are looking for the world's second-largest economy to unleash a more aggressive mix of rate rises, currency appreciation, lending restrictions and higher reserve requirements for banks.
"Reserve requirement hikes aren't going to prove totally sufficient in dealing with overall inflation. Monetary tightening by year-end is inevitable, I wouldn't rule it out in very near term," said Jeremy Stretch, currency strategist at CIBC.
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