Bank acts in further attempt to damp down Chinese inflation

China yesterday raised required reserves to a record 19.5 per cent, adding to an increasingly aggressive effort by Beijing to stamp out stubbornly high inflation.

The fifth increase since October, all in increments of 50 basis points, will force the country’s lenders to lock up a bigger chunk of their deposits at the central bank from next week, removing cash from the fast-growing economy that otherwise would be pushing prices higher. The move by the People’s Bank of China followed an acceleration in inflation to 4.9 per cent in the year to January.

This was accompanied by worrying signs that price pressures in the country were spreading beyond food to property and consumer goods.

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Over the past four months, China has also raised interest rates three times and ordered banks to issue fewer loans in an attempt to make sure it can meet a 2011 inflation target of four per cent.

By themselves, the individual tightening steps have been small, but taken together they amount to an increasingly intensive effort by Beijing to rein in inflation, which has been a source of political unrest throughout Chinese history.

China is not alone. Central banks across emerging markets have tightened monetary policy during the past year as they rebounded from the global financial crisis much faster than the developed world.

Both India and Brazil raised policy rates in January to quell inflationary pressures.

Zhu Song, a senior trader at Bank of Communications in Beijing, said: “China has been moving pretty swiftly in monetary tightening this year.”

Sensitive to demand from the country, copper prices dipped, oil lost ground and the currencies of commodity exporters such as Australia weakened.

Adam Cole, global head of currency strategy at RBC Capital Markets, said: “We think there is more to come in terms of reserve requirements and higher rates and a more rapid appreciation of the currency than the market is discounting.”

Soaring food costs have driven Chinese inflation, rising 10.3 per cent in the year to January and accounting for nearly three-quarters of the jump in overall prices.

But pressures have been broadening. Non-food inflation, long subdued, rose at its fastest pace in more than a decade in January. Property prices have also been picking up steam again, despite measures by the government to cool the market.

The latest decision to raise required reserves was widely expected by investors in China because a selection of central bank bills will soon be maturing, adding more liquidity to an economy already awash in cash.

The widespread rise in prices is a result of excess cash in the economy, stemming from China’s trade surplus.

Anti-inflation talk from the central bank in recent months has primed investors for more policy tightening to come.