04/18/2011, 00.00
CHINA
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China raising bank reserve ratio for the fourth time this year

The seventh increase of its kind since October 2010, the measure is meant to fight inflation, which hit 5.4 per cent in March. Experts agree that Beijing will have to appreciate the yuan to stop prices from rising. Without it, hundreds of millions of middle income Chinese could fall into a downward spiral, causing social tensions.
Beijing (AsiaNews/Agencies) – China yesterday raised the proportion of deposits that banks must hold in reserve for a fourth time this year, a step designed to drain liquidity from the market and slow inflation. Experts believe however, that such a measure will not be sufficient, as was the case in the past. Beijing should instead review its economic policies and act on the yuan.

The latest decision to raise the required reserve ratio for the country’s biggest banks is the seventh of its kind since October 2010 and is expected to lock up 350 billion yuan (US$ 53.5 billion).

Since October, interest rates have also been jacked up four times to reduce borrowing and slow inflation.

China’s fourth quarter growth rate stood at 9.7 per cent, higher than expected, but this comes with inflation at 5.4 per cent last month, against a forecast of 5.2 per cent and a government target of 4 per cent.

Experts argue that this trend, with high economic growth and high inflation, is especially detrimental to middle class household, whose purchasing power is being eroded, as their income does not keep up with rising prices.

Food inflation is particularly high, a problem especially serious because food represents the highest ticket item in middle-income family budgets.

At the same time, if the gap between a small class of rich (most of whom are Communist Party leaders) and hundreds of millions of downward mobile people widens, the risk of social unrest will increase.

Since the economy is growing, analysts believe that further action by the central bank is still possible on the cost of borrowing or on the banks reserve ratio.

On Saturday, The People’s Bank of China Chief, Zhou Xiaochuan said that policy tightening would continue for a while. In fact, observers expect a new hike in passive bank interests next week.

Increasingly, experts also agree that Beijing will have to raise the value of the yuan, hitherto held low against the dollar to favour Chinese exports.

A higher exchange rate might hit exports but would also cut the cost of expensive imports and raw materials with a positive impact on domestic prices.

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