China raised banks' required reserves yesterday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second largest economy.
SCMP, April 18
That's how they describe it in Beijing anyway. But I think the facts tell a different story. Here is how I would rephrase that first paragraph: the Peoples Bank of China raised the required reserves of commercial banks yesterday for the fourth time this year so that it could continue to rig the yuan at an artificial exchange rate despite an enormous imbalance on the balance of payments. It still pretends that this is an inflation-fighting move.
Let's review some history here first, which is always best done with charts. The first one shows you that, yes indeed, inflation on the mainland is rising again. But it is still not as high as it was in early 2008 and certainly nowhere near the peaks reached in 1989 and 1994.
The chart also shows that historically the PBOC has used the interest rate it charges on loans to financial institutions as a way of resisting inflation but always belatedly and never very aggressively. It prefers direct ministerial orders - Thou shalt not lend no more. The latest interest rate movements here certainly do not seem to indicate any policy change or alarm in the monetary authority.
Yet the second chart appears to tell a different story. The statutory reserve ratio, the percentage of deposits that commercial banks must keep out of circulation by placing them with the central bank, has risen to record heights, far above where it stood in those two inflation peaks of 1989 and 1994.