More confirmation that the economy is maintaining its momentum, and policymakers a degree of nervousness. The People’s Bank of China has again raised its capital reserve requirement for the big banks, the sixth and latest of its step increases as the central bank continues to tighten monetary policy. The capital reserve ratio will be increased to a record 21.5% from June 20th.
The central bank made the announcement in the immediate aftermath of the publication of May’s consumer price inflation number, which at 5.5% is the highest in almost three years. The one following the other so quickly was unusual, but the central bank may have been attempting a little inflation expectation management combined with sopping up some of the foreign-exchange inflows that will have come with a resumption of trade surpluses in April and May. Nonetheless, the inflation number may be of more pressing political than economic concern, if the weekend’s riots in Zengcheng are any indication. Food price inflation in May was 11.7%.
The economy’s growth is moderating in a far more comfortable way for policymakers as the rate of new bank lending and money-supply growth is slowly but surely reined in. May’s greater than expected rise in industrial production and the slight rise in retail sales also suggests that the economy is maintaining enough momentum to take another step rise in interest rates, which would be the fifth since last September, in its stride.