China raises banks' reserve requirements by 50 bps

The Peoples' Bank of China (PBC) today announced a 0.5 percentage point (or 50 basis points) increase in the reserves that commercial banks should hold with it, in what is believed to be a bid to cool lending and tame rising inflation.

"The PBC has decided to raise the RMB reserve requirement ratio for depository financial institutions by 0.5 percentage points as of 18 January 2010," the central bank said in a website release.

PBC, however, has exempted small financial institutions and rural lenders from the hike.

"Small financial institutions such as rural credit cooperatives are temporarily exempted from the adjustment to strengthen financing for the agricultural sector and support preparations for spring farming," the release added.

The 50 basis point increase, which would be effective 25 February, comes after China on Thursday reported an unexpected slowdown in consumer price inflation in January to 1.5 per cent.

PBC had increased the reserve requirements for banks last month as well and the second hike in succession has comes as a surprise.

The move, which comes on the eve of its New Year's holiday, could slow bank lending and tame rising inflation.

The monetary tightening also points to a more aggressive currency policy by the Asian giant, which is in constant conflict with the West over its currency policy.