Analysts: Ratio increase good to curb inflation
Watch Video
Play VideoFinancial markets were caught off guard after China's central bank raised the required reserve ratio. Analysts say the increase of the ratio is a good way to address excess capital liquity in the country, and curb inflation.
Experts say macro control measures are usually adopted for four reasons - economic growth, job creation, coordination between price levels and international balance of payments.
As an important monetary tool, interest rate changes will affect those four aspects. Currently China's interest rate is lower than its inflation rate, so analysts believe its feasible to make an interest rate hike. But the central bank is hesitant, due to fears higher rates will draw in more foreign capital, creating excess liquidity.
Ba Shusong, Deputy Director, Dev't Research Center, State Council, said, 'Since this year, especially the second half of the year, overseas capital inflow is obviously accelerating. This is because the interest rate difference between Chinese banks and US banks is at a high level. So if China raises its interest rates, more overseas capital may rush in.'
Experts also point out that a continued rise in inflation could be due to excessive liquidity. Analysts say that an interest rate hike will only raise the cost of borrowing and may not have a great effect on liquidity control. Instead, they say raising bank reserve requirements is a more suitable solution to tackling this issue.
In addition, the central government faces multiple tasks including stabilizing economic growth, adjusting the country's economic structure and controlling inflation.
The bank reserve requirement is a relatively moderate tool which can limit higher borrowing costs for enterprises while not hurting the real economy.
Comments