China hikes bank reserve ratio for 6th time this year to battle inflation   2011-06-14 15:46:51 FeedbackPrintRSS

BEIJING, June 14 (Xinhua) -- China's central bank Tuesday said it would raise the banks' reserve requirement ratio (RRR) by 50 basis points for sixth time this year, a move aimed to withdraw liquidity out of the market as inflation remains stubbornly high.

The latest rise, effective on June 20, means banks have to set aside 21.5 percent of their capital in reserve, a record high. Analysts estimate it will freeze capital worth about 370 billion yuan (56.92 billion U.S. dollars).

The move came as the National Bureau of Statistics (NBS) reported a 5.5 percent increase in the Consumer Price Index (CPI) in May, a 34 month high.

The government would continue to prioritize easing prices in its macro regulation, since the pressure from price increases remained hefty, NBS spokesman Sheng Laiyun said at a press conference on Tuesday.

"Excess money supply is the main reason behind the high CPI reading.Therefore, the RRR increase would work to prevent further prices increase," said Yang Ruilong, an economic professor with Renmin University.

In addition, with the end of the central bank's previous phase of open market operation and the inflow of foreign exchange, nearly 1 trillion yuan of liquidity will enter the market in June, according to an estimation by Lian Ping, chief economist with the Bank of Communication.

The expected inflow of liquidity was the reason behind the latest hike, Lian said.

To soak up liquidity, the People's Bank of China (PBOC) has raised the RRR once a month over the past six months. It also twice hiked the benchmark lending and deposit rates.

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