China's central bank on Monday raised the amount that lenders must hold in reserve for the ninth time in 13 months, the latest step in its campaign to keep the world's fourth-largest economy in check.
The 0.5 percentage point increase in the reserve requirement ratio would take effect on August 15, the People's Bank of China said on its Web site, www.pbc.gov.cn. That takes the ratio for big banks to 12.0 percent.
Many economists were not surprised by the move, though it is uncommon for the central bank to announce such policy moves on a Monday.
The step follows an increase in interest rates on July 20 that was accompanied by a reduction in the tax on interest income from bank deposits, which was intended to give individuals less of an incentive to bet on the country's red-hot stock markets.
It's pretty much as we expected -- no big surprise. This is not policy tightening, it's policy tweaking, as the central bank tries to offset the liquidity injected by the trade surplus, said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.
The central bank said the increase was aimed at strengthening management over liquidity in the banking system and controlling excessive growth in money supply and credit.
The broad M2 measure of money supply grew by 17.1 percent from a year earlier in June, above the central bank's full-year target of 16 percent.
Economists say much of that growth in liquidity is the result of the country's accumulation of foreign exchange stemming from its record trade surplus and heavy inflows of investment.
China's foreign exchange reserves were $1.33 trillion at the end of June, the largest stockpile in the world.
In an effort to keep the yuan from rising too quickly, the central bank buys much of the foreign currency entering China. It has to print yuan in return, thus flooding the financial system with cash.
The central bank has now raised the requirement six times in 2007. It has also raised interest rates three times so far this year.
These reserve requirement ratio hikes help to deal with the liquidity but I see them more as addressing symptoms rather than the cause, which has more to do with the large trade surplus and large capital inflows, said Rob Subbaraman, chief economist for Asia ex-Japan at Lehman Brothers in Hong Kong.