China to Raise Reserve Requirement Ratio…..Again

For the second time in less than five weeks China’s central bank has moved to limit lending to consumers and businesses by ordering big commercial banks keep larger amount of deposits at the bank. The reserve requirement ratio was raised to 16.5% up half a percent to be enforced February 25th. The idea behind this increase in the ratio is to keep inflation down, as prices throughout China have been increasing, especially in housing. Fortunately, rising producer prices and asset prices have not yet fed into high inflation in consumer prices, which moderated to 1.5% in January from 1.9% in December

Investors remain concerned about whether Chinese authorities can strike the right balance as they rein in stimulus policies. "The Chinese economy is not yet overheating. They have to prevent a bubble from forming, but there is also a risk to tightening too soon," said Lu Ting, China economist for Bank of America-Merrill Lynch. The truth is China’s economy is growing at an exponential rate, it powered to 8.7 percent growth last year, by far the strongest of any major economy.

New local currency loans totaled 1.39 trillion Yuan last month, nearly one-fifth of the government's target for the year of around 7.5 trillion Yuan. The measures Beijing has already taken to slow bank lending appeared to have some effect in the second half of January, although authorities remain concerned about the pace of lending getting out of hand. The central bank wants to "foster reasonable growth in money supply and credit" this year.

Economists expect the central bank to continue raising banks' reserve requirements in coming months. China is a huge player in the global economy and if a bubble is forming it must not burst or the world economy will face huge consequences.