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China raises bank reserves to record, fighting inflation

February 18, 2011|Reuters

China raised required reserves to a record 19.5% on Friday, adding to an increasingly aggressive effort by Beijing to stamp out stubbornly high inflation.

The fifth increase since October will require the country's lenders to lock up a bigger chunk of their deposits at the central bank, 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% in the year to January, which was accompanied by worrisome signs that price pressures were spreading beyond food to property and consumer goods.

In the last 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 4%.

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 modern Chinese history.

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

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

Soaring food costs have driven Chinese inflation, with prices rising 10.3% 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 a battery of measures by the government to cool the real estate market.

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