In the face of excessive liquidity and high inflation China has raised its banks' required reserves today to a record 20.5%. This has not come as much of a surprise as data last week showed that inflation was accelerating.

This is the seventh time that the reserve requirements have been raised since last October, as well as the four times that the interest rates have been raised within the same time frame.

Both the Premier Wen Jiabai and the Central Bank Chief Zhou Xiaochuan have indicated that policy tightening will continue for as long as it takes to bring inflation under control.

"The inflation picture is still worrisome and bank lending rebounded in March," said Zhao Xijun, economist at Renmin University in Beijing in The Times of India. "I think the central bank will raise interest rate in the coming weeks — probably in June."

Inflation in March put consumer prices rising at 5.4% since the start of the year, the fastest rate since July 2008.

The 50 basis point rise will become effective from April 21st and will tie up an extra 350 billion yuan, about $53.6 billion, that the banks will have to retain instead of using as a basis for new lending.

Despite a $1.02 billion trade deficit in the furst quarter of 2011 China's foreign exchange reserves were boosted by some $200 billion to $3 trillion as the broad M2 money supply rose by 16.6%, which is above expectations.

According to China Daily, [1] earlier in the month the tightening of policy had already made mortgages more scarce.


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