In the latest of a series of efforts to tighten monetary policy, China announced two hikes in commercial banks’ reserve ratio requirement. The first of the two 0.5 percentage-point increases – which came into effect on June 15 and June 25 respectively – take the reserve ratio to a record-high 17.5%.
By forcing banks to hold a higher proportion of their assets in cash, the central bank hopes to restrict lending and drain liquidity from the financial system.
Earlier tightening efforts appeared to be taking effect as the consumer price index (CPI) came to 7.7% in May, down from 8.5% in April. A fall in food prices – which rose 19.9% in May after a 22.1% increase in April – was the driving force behind the slower headline inflation rate. Non-food inflation fell slightly to 1.7% from 1.8%.
But producer price inflation hit a three-year high of 8.2% due to rising input costs. Economists say this is evidence of underlying inflationary pressure that has yet to work its way through the system.
It is suggested that Beijing may allow faster renminbi appreciation to reduce import costs and peg back inflation still further. Currency appreciation was partly responsible for a 40% year-on-year surge in import growth in May. Imports totaled US$100.29 billion while exports came to US$120.49 billion, up 28.1%. May’s trade surplus of US$20.2 billion was 10% year-on-year.
However, China’s foreign exchange reserves increased by US$74.46 billion in April, more than triple trade surplus and foreign direct investment inflows. The difference was put down to inflows of hot money looking to profit from renminbi appreciation.