China’s central bank has recently raised the reserve requirement ratio for banks to tighten the noose for inflation threat. This is the fourth time in six months central bank has raised the reserve requirement ratio to check the nation’s money supply. The strategic move, taking effect this month, has moderately increased the reserve ratio by half percent, to 9.5 percent. The Chinese authorities were in recent times worried over too much money being pumped up in the financial channel as it increases the threat of inflation and probably triggering a stock market bubble. There are high chances that if the stock market continued to move up there could be further tightening.
Raising the reserve ratio that Chinese banks keep in compliance with the central bank in effect restricts the amount of money that banks can lend. The recent decision, being not very restrictive, has been taken with a view to control excessive lending to new factories, real estate and road construction.
The Chinese authorities are cautiously watching developments at stock market as recently China’s stock market is thriving at a phenomenal rate after years of stagnation. The rate of growth at stock market can be imagined with the fact that last year the Shanghai exchange rose 130 percent what can be translated as the best performance of any major stock exchange in the world in 2006.
The Chinese government is of course strong-minded to keep the economy expanding though on a stable rate as it fears moving at a breakneck speed the economy might crash before 2008.
The central bank has said that in recent months to mark the first time in five years the bank saving of the Chinese citizen have decreased significantly. According to estimates, more than $30 billion from the bank deposits have been flowed into mutual funds or directly into stock market in just six weeks.
On the other hand, experts are of the view that the government has used reserve ratio as an instrument to manage the economy however this has not been very effective in terms of handling the economy. Consequently, they are expecting a limited or no impact on the economy and the financial markets.
