China raises reserve ratio for banks to ward off inflation

China raised the reserve ratio for the nation's banks Tuesday for a sixth time this year, just hours after announcing the highest inflation numbers in 34 months.

The hike of 50 basis points raises to record highs the amount of deposits that Chinese banks must hold in reserve rather than lend out to consumers and businesses. The measure, which goes into effect June 20, is aimed at cooling the economy by taking about $59 billion out of China?s banking system, said Qu Hongbin, co-head of Asian Economics Research for HSBC.

?Inflation, not growth, remains the top macro risk facing policymakers,? Qu said.

China?s consumer price index, the main gauge of inflation, grew 5.5% in May from a year earlier ? the fastest pace since July 2008.

Rising prices for basics such as food, fuel and housing are squeezing the budgets of working families. Central policymakers appear determined to rein in inflation, considered one of the greatest threats to social stability, even at the risk of slowing China?s economy.

However, their decision to boost the reserve ratio instead of raising benchmark interest rates ? a much more aggressive move ? signals that they don't want to tighten too much too quickly, analysts said.

?Officials tend to use benchmark interest rates in that signaling role but they may have thought that, given current growth concerns, the signal that would give would be too strong,? said Mark Williams, senior China economist for Capital Economics.

Still, that doesn?t rule out an interest rate hike in the coming weeks. Analysts said inflation hasn't peaked and the likelihood of the third rate hike this year remains strong, along with additional reserve ratio increases.

-- David Pierson

Photo: Chinese banks are being asked to hold record amounts of capital in reserve. Credit: Zhong Min / EPA