China tightens noose on inflation

Chinese banks will have to hold more of their deposits on reserve with the central bank as the government accelerates its fight against inflation.

The People’s Bank of China has upped the deposit reserve ratio by 0.5 percentage points to 19% for all Chinese banks, effective from January 20.

The move is intended to reduce the amount of money banks can lend and combat stubbornly high inflation. Although this is technically not an interest rate rise, it does limit the amount of money available in the economy. (article continues below)

Like many other emerging market economies, China faces the dilemma of controlling rising inflation without choking off growth.

At the end of last year, Chinese inflation reached a 28-month high of 5.1% year-on-year as food prices surged. This has hit poorer parts of the population particularly hard. With food prices being on record highs, some families are forced to spend as much as half of their income on food.