The central bank yesterday announced that it would raise the reserve requirement ratio, or proportion of funds lenders must hold in reserve, by 0.5 percentage point to mop up liquidity and anchor prices.
Effective March 25, the upward revision - the second this year - will push the ratio to 15.5 percent, the People's Bank of China said on its website.
"The central bank move is targeted at mopping up liquidity, which is a driving force behind the continually rising prices," said Guo Tianyong, economist with the Central University of Finance and Economics. "But there is no close link between such moves and the stock market."
But the fragile market, which dived nearly 4 percent yesterday after declining about 30 percent this year, may over-react to the hike, Guo said.
Hours before the announcement, Premier Wen Jiabao vowed that the country will continue to adopt a range of policies to fight inflation and balance economic growth. "Controlling price rises and curbing inflation will be the top priorities for the government this year," he said.
The country is facing serious inflationary pressure and analysts said keeping liquidity under control is one option to tame rising prices.
"The central bank move is not surprising, and more such moves may be announced this year," said Wang Tao, head of economics and strategy at Bank of America (Greater China).
There is still room to further raise the ratio as long as liquidity is on the rise, she said, adding that "raising the ratio is a low-cost tool to neutralize liquidity".
To effectively control liquidity growth, she suggested, the authorities need multiple policies, such as strengthening foreign exchange checks to prevent speculative capital from flowing into the country to profit from rising yuan assets.
Source: China Daily
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