China's central bank decided on Tuesday to raise the deposit reserve requirement ratio of commercial banks to a record high of 15.5 percent as of March 25, the second such move this year.
The move was to further strengthen the regulation of liquidity in the banking system and allow bank loans to increase in a reasonable way, said a statement on the website of the People's Bank of China (PBOC).
It echoed Premier Wen Jiabao's talks at a press conference Tuesday that the government would tackle soaring prices and mounting inflationary pressure.
In his government work report to the National People's Congress, Wen said the task of holding down inflation was "difficult".
"The current price rises and increasing inflationary pressures and are the biggest concern of the people," he said.
China's inflation rate has continued to accelerate, with the consumer price index (CPI) up 8.7 percent year-on-year in February, the biggest jump in nearly 12 years, posing greater challenges for a country already bothered by excess liquidity.
Wen acknowledged that it will be hard for China to attain its goal of holding the rise in the consumer price index (CPI) at about 4.8 percent and controlling price rises this year, and it is made even more difficult by the worst sleet and snow disaster in decades in the first two months of this year.
The unusually harsh winter had dealt a serious blow to vegetable and rapeseed crops and killed many pigs and chickens, cutting down market supply and caused price rises.
But he insisted that the government is fully confident of controlling inflation this year.
Yi Gang, vice-governor of PBOC said earlier that China's top task is to combat inflation in 2008, and tight monetary policy wouldn't be changed despite the impact of the subprime crisis and heavy snow.
In its bid to contain rising inflation, the central bank has raised the reserve requirements 12 times and the interest rates six times since last year.
However, Justin Lin Yifu, the World Bank's chief economist, said interest rate rises would be more desirable than raising reserve requirements.
"Raising the reserve requirements would make getting loans difficult for small and medium-sized enterprises, which play a more important role in providing employment than large enterprises," he said early in March. "Interest rate rises would not invite an inflow of overseas hot money, for China has not opened its capital account."
China's central bank governor Zhou Xiaochuan said early this month there was room for interest rate increases, but domestic and international factors needed to be considered before an adjustment.
"China has many domestic factors to be considered in interest rate adjustments."
Chinese shares sank on Tuesday amid persistent concerns over tighter policies and a possible economic slowdown resulting from a U.S. recession, with almost all stocks closing lower.
The benchmark Shanghai Composite Index went down 3.96 percent to end 3,668.90 on Tuesday, the lowest point in about eight and a half months.
(Xinhua News Agency March 19, 2008)