Metals News
China Raises Bank Reserve Requirement Ratio by 50 Basis Points
smm insight
Mar 21,2011

BEIJING, Mar. 21 -- The People's Bank of China (PBOC), China's central bank, announced Friday to raise the bank reserve requirement ratio by 50 basis points from March 25.

The hike, the third this year and the ninth since the beginning of last year, is the latest move to soak up liquidity to check inflation.

After the hike, major banks will have to set aside 20 percent of their reserves and small and medium-sized banks will have to keep 16.5 percent of their deposits in reserve.

China's consumer price index (CPI), a main gauge of inflation, rose 4.9 percent in February, the same as January's.

"It is beyond my expectation. The move shows the central bank's determination to further control liquidity as the CPI would probably continue rising in March," said Jiang Chao, an analyst with Guotai Junan Securities.

The central bank's aggressive open market operations this week had eased speculation of further tightening measures.

On Thursday, the central bank auctioned 50 billion yuan (7.61 billion U.S. dollars) of three-month bills at a yield of 2.7944 percent and sold 60 billion yuan worth of 91-day repurchase agreements to banks with a yield of 2.8 percent.

Offsetting the 181 billion yuan of bills and repurchase agreements that matured, the central bank took 49 billion yuan of liquidity out of the money market this week through open market operations on Tuesday and Thursday.

"The surprising move will lock up about 400 billion yuan of cash that banks would otherwise have been able to lend," said Lu Zhengwei, chief economist with the Industrial Bank, adding there will be no interest rate hike in March.


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