China Monetary Policy


Central Bank struggles to absorb bank liquidity

On 26 August, the People's Bank of China (PBOC) announced that commercial banks will be required to widen the coverage of the reserve requirement ratio (RRR) to include margin deposits such as commercial bills, letters of credits and guarantees. The change was implemented on 5 September and will be completed by 15 February 2012. The PBOC aims to curb brisk growth of off-balance sheet activities and to draw liquidity from the banking system. With this move the PBOC will set aside around RMB 900 billion (USD 140 billion), which is the equivalent of an increase of about 100 to 150 basis points in reserve requirements. Meanwhile, the lower inflation reading for August, along with other indicators that also suggested moderation both in growth and inflationary pressures, suggests that monetary authorities will not tightening their policy further going forward.

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