CHINA'S central bank said yesterday it will require commercial banks to set aside more money in reserves to mop up liquidity and curb lending, the seventh such increase this year.
Economists have been expecting new austerity measures in the face of rising inflation.
The reserve ratio - the amount of money a commercial bank must park at the central bank - will increase 0.5 percentage point on yuan deposits to 12.5 percent starting September 25, the People's Bank of China said on its Website yesterday.
"The move is aimed at managing liquidity in the banking system and curbing excessive growth of credit," the central bank said.
The increase in the reserve requirement was the tenth since June 2006. Those steps were accompanied by four interest rate increases this year - the latest on August 22 - and other austerity measures designed to rein in inflation and moderate the booming economy.
China's Consumer Price Index, the main gauge of inflation, jumped 5.6 percent in July, the biggest increase since February 1997, mainly as a result of rising food prices.
The monthly spike pushed the January-to-July inflation rate to 3.5 percent, above the central bank's three percent target for the year.
Financial analysts expect more moves by the central bank later this year.
Liang Hong, a Goldman Sachs economist, expects that the August inflation figure, which is scheduled to be reported on Tuesday, will show a 6.2 percent increase. Stephen Green, a Standard Chartered Bank senior economist, gave a six percent forecast.
Su Ning, deputy central bank governor, said last week that China will closely monitor inflation.
He also admitted this year's three percent inflation target will be hard to achieve.
Standard Chartered's Green said the central bank's move yesterday makes sense as a clear and early effort to soak up liquidity and signal that the PBOC is in control.
China's M2, the broad measure of money supply including cash and deposits, grew 18.5 percent in July from a year earlier to 38.39 trillion yuan (US$5.05 trillion).
Excessive liquidity has also heated up the stock market. The benchmark Shanghai Composite Index has gained 98 percent so far this year after soaring 130 percent in 2006.