China's Central Bank increased the amount of money commercial banks must keep in reserve just hours after Premier Wen Jiabao warned inflation was a top concern. The People's Bank of China said in a statement the bank reserve ratio would rise half a percentage point to 15.5% from March 25, in yet another bid to implement tight monetary policies and cool the economy.
The rise is "to strengthen management of liquidity in the banking system and to guide the rational growth in money supply and credit," the bank said. The Yuan on Wednesday climbed to the highest since China ended a dollar peg in 2005, 7.06, having gained 3.4% so far this year, almost half the advance for the whole of 2007, as it seeks to cut the cost of imported goods and slow export growth. "We need to ensure the fast yet steady economic development in the country and at the same time we need to effectively hold down inflation," the premier said in an annual press conference following the end of parliament. Premier Wen Jiabao pledged to narrow China's record trade surplus that has flooded the economy with cash, swelled currency reserves to 1.5 trillion US dollars and fuelled tensions with the US and Europe, its largest trading partners. Exports grew at their slowest pace in almost six years last month. Wen anticipated "forceful" steps to damp inflation a sign overheating remains the government's main concern even as global growth slows. The government's 4.8% inflation target for 2008 will be "difficult"' to achieve, he said. The reserve ratio hike, the second this year and the 12th since the beginning of 2007, reduces the amount of money flowing through the economy. China's inflation rate hit a near 12-year high of 8.7% in February, while its economy expanded by 11.4% in 2007. The latest move will freeze 200 billion Yuan (28 billion dollars) in the banking system, according to estimates. Analysts argued the fact that China's monetary authorities decided to act first on the required reserve ratio could suggest an interest rate hike might now be a more distant prospect.