China's central bank said on Thursday that it would raise lenders' required reserves by 50 basis points, the fifth time this year and the eighth since October.
The move increases the required reserve ratio for the country's biggest banks to a record 21 percent, another step in the government's campaign to control inflation.
-- The central bank has been raising reserve requirements at a pace of about once a month since October.
-- The central bank relies on the rise bank reserves to soak up excessive liquidity in the economy as it struggles to issue bills.
-- The central bank has said it will use a combination of policy tools, including required reserves and interest rates, to put a lid on inflation, which clocked in at 5.3 percent in April from 5.4 percent in March.
CAO XUEFENG, HEAD OF RESEARCH, HUAXI SECURITIES
I'm not surprised to see this happen now, because the inflation figure for April was still above market expectations despite being lower from March. Along with the resumption of open markets sale of 3-year bills this morning, this is the probably the best PBOC can do to mop up liquidity without affecting the market too much.
We think the PBOC could continue rising reserve rate ratio up to 23 percent.
BRIAN JACKSON, SENIOR EMERGING MARKETS STRATEGIST, ROYAL BANK OF CANADA IN HONG KONG
When we look at the inflation and bank lending data and with the PBOC saying that there is no natural upper limit for reserve requirement increase, I don't think this is a big surprise.
I expect the benchmark lending rate to be hiked by 25 basis points by June-end and another 25 basis points by Q3. I do expect inflation to come down by second half of this year but if it does not ease quickly enough, we expect more rate hikes.
PAUL TANG, CHIEF ECONOMIST, BANK OF EAST ASIA
I think this surprised the market a little bit because we generally expected that the PBOC will raise interest rates. But it has not done so, I think it is mainly due to the recent figures showing the economy is going down quite a bit.
From the purchasing index, the retail sales figure, we can see the growth has been decelerating. I think they will make a pause in interest rate hike. But that doesn't mean that the interest rate hike comes to an end. It just means that they will take a wait and see approach on that front.
But on the liquidity front, I think they will keep up the effort. The main target is the property sector. We have seen many mainland cities' property transactions have been coming down quite a bit but the property price has yet trending downward. I think until that happens, they will continue to raise the deposit reserve ratio. I think maybe another 50 to 100 basis points.
WEI YAO, CHINA ECONOMIST WITH SOCIETE GENERALE IN HONG KONG
From the April data released yesterday, we think it is too early to call an end to China's tightening. That's exactly what they are doing now.
The capital inflows (into China) in April could be as strong as in March, and the central bank is under a lot of pressure to sterilize.
The central bank has restarted the three-year notes, but that's far from being enough to serialize all those inflows, and open-market operations are too expensive for the PBOC, that's why they are raising the RRR.
As long as capital inflows continues, they will have to raise the RRR. From a macro-perspective, it is not a tightening but a sterilization of liquidity.
Although the banks are crying, there's nothing else the central bank can do about it.
E YONGJIAN, AN ECONOMIST WITH BANK OF COMMUNICATIONS IN SHANGHAI
It is a bit surprising because the central bank has just restarted three-year central bank bills. The liquidity situation remains loose with strong foreign capital inflows, which is why the central bank has to raise the deposit reserve ratio.
If foreign capital inflows remain strong in the coming months, the central bank may increase the ratio further. So far, it is too early to say that the ratio has reached its ceiling.
XU BIAO, AN ECONOMIST WITH CHINA MERCHANTS BANK IN SHENZHEN
The central bank is raising the deposit reserve ratio again to soak up liquidity as hot money inflows and current account surplus remain large.
It should not be read as a real tightening move. Instead, it may have become part of China's neutral monetary policy operations. If that's the case, the central bank will continue to raise the ratio.
(Reporting by Zhou Xin, Kevin Yao, Alison Leung, Clement Tan and Vidya Ranganathan, Editing by Don Durfee)