China tightens again

China announced another round of monetary tightening today. Xinhua Online reports:

The required reserve ratio for financial institutions engaged in deposit business will be raised by 0.5 percentage point as of May 15 to 11 percent, the People's Bank of China said on Sunday.

This is the fourth time the central bank has raised the deposit reserve ratio this year and the seventh time since last year in an effort to rein in excessive liquidity and cool the booming economy.

This is not likely to be the end.

"Raising the reserve ratio is a rather easy and flexible measure for the central bank, but it might need to raise interest rates if the nation's strong economic momentum and inflationary pressures continue in the second quarter," said Wang Xiaoguang, a researcher at the Economy Research Institute of the National Development and Research Commission, the top economic planner...

Li Xiaochao, spokesman of the National Bureau of Statistics, said recently that China is running the risk of shifting from relatively fast economic growth to an over-heated economy.

Li acknowledged that the Chinese government should take more small steps to ensure a stable and fast economic growth, rather than introduce drastic cooling measures.

Economists cited by Bloomberg think so too.

"The next steps for the central bank are to raise interest rates and allow the yuan to appreciate faster, possibly by widening the trading band," said Huang Haizhou, an economist at Barclays Capital in Hong Kong. "The tightening so far has done little to curb liquidity."...

"They will do more," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd in Hong Kong. "Raising interest rates is more effective in cooling growth and I think they'll raise rates again in June."