Breaking News: People’s Bank Of China Raises Reserve Requirement Ratio

I am not sure if that is some kind of illusion, but the frequency of People’s Bank of China’s action seems to be increasing.  Once again, People’s Bank of China raises reserve requirement ratio by 50 basis points, effective on 24 Feb 2011.  This will bring the new reserve requirement ratio to 19.5%.

Following the less-than-expected inflation figure earlier this week, perhaps a few people might think that the pace of tightening will be slower.  Now, of course, it is proved wrong.  Now the money supply growth is back to the “normal” level we saw in the pre-subprime crisis level (that is about 16-17% year-over-year), although that growth rate can still be judged as too fast.  As I have said, rising prices is a big concern, particularly in the food prices.  With winter drought potentially affecting wheat production, there is a chance that food prices will go higher still, bringing up the inflation figure (even the weighting of food has been reduced marginally).  The rising home prices and rents are also a big concern.  The 70-city home prices index today showed a overall nation-wide rise of home prices.  Although Beijing has announced their own set of rules to curb home prices, and I expect more cities to follow (they have to anyway), I am still a bit sceptical on the effectiveness of government intervention

On the whole, if the Chinese government is serious about fighting inflation and curbing home prices, the most effective tool, in my view, has to be monetary policy.  So I continue to expect more tightening on the road in the coming months.

Check out my China Economic Predictions 2011

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