For the 10th time this year China will order banks to raise the amount of reserves they keep on hand in order to curb inflation and prevent the economy from overheating.

The central bank said it had ordered banks to increase the reserve ratio by a full percentage point, to 14.5%, in an effort to curb lending. It was the largest single increase in the reserve ratio in four years.

Analysts said the move showed that Beijing was growing increasingly worried about growing inflationary pressure and the threat of a meltdown before next summer, when Beijing is set to hold the Olympic Games.

This year, a fast-growing economy has taken flight, growing by as much as 12% with China piling up another year of record trade surpluses with the rest of the world, particularly the European Union and the United States.

China is under mounting pressure to appreciate its currency, which some economists say may help ease those trade gaps and better balance the global economy. But China has largely resisted that pressure, saying it has already allowed its currency to gradually appreciate, up about 10% since 2005.

Over the past few years, Chinese stock prices have risen more than 300%, investor frenzy has turned mad and initial public offerings have created more than 100 new billionaires, at least on paper.

In a report, Hong Liang, an economist at Goldman Sachs, said the larger-than-usual increase in the reserve ratio should strengthen the credibility of the central bank but could also hurt share prices.
Source: International Herald Tribune