China Raises Bank Reserves by 50 Basis Points

“BEIJING (Reuters) – China lifted bank reserve requirements by 50 basis points on Thursday, signaling that containing inflation and soaking up excess cash remained its top priority even after signs the economy was slowing down.

The announcement of more tightening came as a surprise to some analysts who had expected the People’s Bank of China to tap the monetary brakes more gently after a host of data from industrial output to imports were weaker than expected in April.

To many of them, China’s latest directive to lock up more of the deposits that banks would otherwise have lent was simply an attempt to drain inflationary capital inflows rather than opt for a rate rise, ostensibly a heavier monetary tool.

“The central bank is moving the deposit reserve ratio again to soak up liquidity as hot money inflows and current account surplus remain large,” said Xu Biao, an economist with China Merchants Bank in Shenzhen.

“It should not be read as a real tightening move. Instead, it may have become part of China’s neutral monetary policy operations. If that’s the case, the central bank will continue to raise the ratio.”

The increase in bank reserves came a day after data showed China’s factory output growth in April eased much more than expected, while annual increases in money supply and outstanding yuan loans hit their lowest pace in 29 months –signs that measures to slow the economy are starting to bite.”

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