The People's Bank of China announced yesterday that it would raise the reserve requirement ratio for commercial banks by 50 basis points to a new high - just hours after news that inflation had hit 8.3 per cent.
The increase pushed the reserve ratio to 16 per cent, but many analysts suggested that a further increase of a percentage point or two within a year was likely because the central bank was under pressure to rely more on higher bank reserves to tighten monetary policy.
'The central bank will use more quantitative measures, such as [reserve ratio] and bank bills, and more aggressive window guidance to enforce monetary and credit tightening, because [it has] less flexibility to use the interest-rate instrument due to the surge in hot money inflows in the first quarter,' Deutsche Bank Greater China chief economist Ma Jun said.
Despite slowing exports, China's foreign exchange reserves, the world's biggest, reached US$1.68 trillion at the end of last month. Analysts say some foreign capital may have been sneaked into the country to bet on the appreciation of the yuan, which has gained about 4 per cent against the US dollar this year after rising 7 per cent last year.
National Bureau of Statistics data released yesterday indicated that the economy grew 10.6 per cent in the first quarter from a year earlier, much higher than many analysts had expected.
At the same time, the consumer price index rose 8.3 per cent last month, pushing the index for the first quarter to 8 per cent.