SHANGHAI, Jan. 5 — China’s central bank said late Friday that it had raised the reserve requirement ratio for banks, the fourth increase in six months, to further tighten the nation’s money supply.
The modest move, which takes effect this month, increases the reserve ratio by half a percentage point, to 9.5 percent. Analysts said it was the government’s latest warning that too much money in the financial system could ignite inflation and perhaps fuel a stock market bubble.
The reserve requirement is a blunt instrument of monetary policy. If open market operations are a scalpel, the reserve requirement is a chainsaw. That China is on such a trajectory with its reserve requirements says that they are clearly concerned about the inflation prospect. However, 9.5% is not extremely tight. In the U.S., the rate for most banks is 10% at the margin (see this table for details). That the Chinese economy has grown to an extent that higher reserve requirements are necessary is another encouraging sign that they are becoming a player in the international financial community. They are experiencing what the U.S. went through in the "roaring '20s." They are hoping to avoid their own 1929. Given the vigor with which money is flowing into China, I would not be surprised if they continue to tighten throughout the year ahead.
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