China Raises Reserve Requirements amid Inflation Concerns


Article first published as China Raises Reserve Requirements amid Inflation Concerns on Blogcritics.

Even as global markets are panicked with the clues from China that it is going to raise its benchmark interest rate, China has announced raise in required reserve ratio (RRR) by 50 basis points to 18.5 percent. This is the second raise in two weeks by the Chinese government. With China’s October inflation recording 25 month high at 4.4 percent, China is poised to reduce the money supply in the economy.

China inflationHowever, markets seem somewhat relieved as the increase has not been as aggressive as expected. Actually, it is expected that China will increase its benchmark interest rate to curb rising inflation. Share markets around the world have been bullish for a week with expectations that China is going to raise interest rate. Even China’s Shanghai index has dropped by 10 percent in last six trading sessions of which 8 percent loss coming from only in last 3 trading days. Shanghai index has lost 4 percent on November 17.

Global markets also have fared badly in this week on Chinese tightening fears. India’s Sensex has dropped by 3.56% this week, a third weekly drop in a row. Though it is said that Indian stock markets are in correction mode, a big fall in last three days of this week is mainly attributable to the fears on China’s tightening moves. Britain’s FTSE 100 has lost 1.51 percent in the week ended with November 19. However, German’s DAX, France’s CAC and the US’ Dow Jones have managed to pare losses on the final day of the week.

Though interest has not been hiked, market analysts are of the view that China is going to do that in near future. China has hiked its bank rate for the first time in three years after the financial crisis in October. It is expected that China would increase interest rate two to four times by the end of the next year as per Reuters report.

Chinese authorities are of the firm view that the inflation has to be contained to prevent property bubble. Emerging market economies are also worried that the US’ QE2 move of $600 billion pumping into the economy will push the prices of their exports and their countries will be flooded with hot money raising inflationary concerns.

China’s raise of RRR by 50 basis points will absorb at least 350 billion Yuan or nearly $53 billion. China’s lending spree in 2009 has also contributed considerably to the heating up of Chinese economy. Now China is likely to allow appreciation of Yuan versus Dollar, a long pending demand the western countries, mainly from the US as its trade deficit with China is going up month by month.

China’s inflation figure is expected to reach 5 % in November while its target rate is 3 percent. So, China will continue to pursue its policy tightening measures in coming months.

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