China surprises with 50 bps hike in reserve ratio

The People's Bank of China (PBOC) increased bank reserve ratios and nudged interest rates higher in the interbank market for the second time in a week in a clear sign that policymakers are trying to cool the rapid economic growth. Authorities in Beijing seem to be concerned about the dangers that inflation poses to the world's fastest-growing major economy. The central bank ordered a boost in the yuan reserve requirement ratio for banks by 50 basis points, or half a percentage point, effective Jan. 18, according to a statement on its Web site. The current ratio is 15.5% for large banks and 13.5% for smaller banks. It was the first increase in the reserve-requirement ratio since Beijing began a massive economic stimulus program in November 2008. The announcement came after the financial markets in China had closed on January 12.

The PBOC didn't give a reason for its decision to raise the reserve ratio, but the move signals that Beijing is increasingly worried that the rapid increase in lending could fuel asset bubbles and raise the risk of inflation. In a statement posted on its Web site, the PBOC said that the proportion of funds that rural credit cooperatives must deposit with the central bank will remain unchanged, to help support spring farming. The announcement follows the Chinese central bank's decision to raise the yield on its one-year bills on January 12 for the first time in five months after a similar move on another benchmark sale on January 7.