The Bank of China indicated on its website today

Sunday, 17 April 2011 03:36

The Bank of China indicated on its website today that reserve ratios will increase to 20.5% from April 21 or a half point increase. With foreign exchange reserves rising to over $3 trillion and continual lending and money supply growth have highlighted risks in the fastest growing major economy.

Increasing the reserve ratio reduces the amount of money banks have available to lend by forcing them to keep more funds at the central bank. New lending in March was over 679 billion yuan and money supply growth accelerated.

GDP rose 9.7 % in the first quarter from a year earlier and inflation accelerated to 5.4 % the most since July 2008. Inflation has exceeded the government’s 2011 target of 4 % each month so far this year this increase is the forth in this year alone.

The government will also try to remove monetary causes of inflation by using reserve requirements, interest rates, the exchange rate, and bill sales to soak up cash. A stronger yuan would slow inflation pressures by countering higher prices for imports yet this is something that China still is avoiding.