Reserve requirements for Chinese banks are at historic highs, a measure that is not expected to calm the skyrocketing consumer price index (CPI). Excess reserves of foreign currency and the paltry appreciation of the renminbi are seen as stoking inflation.
The People’s Bank of China, as of June 20, will increase the deposit reserve ratio by 50 basis points, establishing an historic high of 21.5 percent for deposits at large financial institutions, while reserves at medium to small banks will increase to 18 percent. The increase should result in the allocation of about US$58 billion in formerly available funds to the banks’ reserves, funds which will not be available to circulate freely and thus fuel inflation.
Xinhua News reported, on June 14, that this is the sixth time this year that the central bank has raised its deposit reserve ratios. Massive amounts of liquidity, totaling nearly US$154 billion are expected to enter the Chinese economy in June as the central bank completes open-market operations and foreign trade accounts are settled.
In May, the Chinese CPI rose 5.5 percent, the largest increase in 34 months, the National Bureau of Statistics affirmed.
Data released by the central bank on June 16 show that China’s financial institutions have foreign exchange on hand amounting to US$58 billion, an increase of 21 percent.
In an interview, economist Jian Tianlun said that the appreciation of the renminbi (Chinese currency) has not been enough to reduce the foreign exchange trade surplus, resulting in continuously increasing foreign exchange reserves. Such a large surplus results in currency flow disruptions and sustained inflation. This is the reason why the central bank has once again raised the deposit reserve ratio. He said: “The appreciation of the renminbi is not enough to avoid further inflation.”
Read the original Chinese article.
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