CHINA'S central bank yesterday lifted lenders' reserve requirements for the second time this year after inflation hit a 12-year high last month, shoring up the need for more tightening in monetary policies.
Starting March 25, commercial lenders must park 15.5 percent of yuan deposits at the central bank, up from 15 percent now, the People's Bank of China said in a Website statement.
China is on track to battle against rising consumer prices, which grew 8.7 percent in February fueled by soaring food costs. Premier Wen Jiabao said yesterday that the surging inflation is now "China's biggest challenge."
"It's just the beginning (of the new round of tightening)," said Wu Huaiming, a Guosen Securities Co analyst. "We are likely to see interest rate increases as early as this month."
The 0.5 percentage-point rise in banks' reserves is set to drain about 200 billion yuan (US$28.2 billion) out of the money market, based on the amount of local-currency deposits at the end of last month.
Last year, China raised interest rates six times and ordered lenders to set aside more reserves on 10 occasions to dampen inflation and shield the economy from overheating. No rate rises have occurred so far this year.
Central bank Governor Zhou Xiaochuan reiterated yesterday that there is room to boost interest rates and bank reserves, signaling monetary tightening is expected to be enhanced in the near term.
Premier Wen said it will be "not easy" to realize the target of curbing 2008 consumer-price growth to last year's 4.8 percent after recent snowstorms, but he noted that the government would stick to the goal.
"We hope to stabilize people's expectations over price increases. When prices rise relatively fast, anticipation of continuous price hikes is more horrible than inflation itself," Wen said.
China's producer prices gained 6.6 percent last month, the most in more than three years, on higher oil and raw material costs. Foreign direct investment also chalked up 75 percent growth in the first two months, compared with 13.6 percent for the entire 2007.
"The rise in producer prices indicated that consumer prices growth could stay high this month and probably for the next several months," said Wu Ke, a Zhongtian Investment Consulting Co analyst.
"The quickened pace in the yuan's increase will likely make more money flow to the country and raise the risks of an investment rebound," Wu said.
The yuan has appreciated more than 13 percent to 7.11 against the US dollar since the link with the greenback was scrapped in July 2005.
Urban fixed-asset investment in January and February rose 24.3 percent from a year earlier to 812.1 billion yuan, the weakest gain since February 2007's 23.4-percent growth.