To explain reserve requirement, to people who are not familiar with it, just like me, it is a regulation by central bank that holds money from commercial banks. The more money the central bank hold, less money flows in the economy. The more money the central bank hold, it usually means there is too much money flowing in the economy. China has recently extend the reserve which was suppose to expire this week. The reserve will continue for another three months.
The move affects six of the country's biggest lenders, including Bank of China (3988.HK) and Industrial and Commercial Bank of China (1398.HK), the sources said.
With the extension of the selective increase, which had been initially ordered in October, the required reserve ratio will stand at a record high of 19 percent for the country's biggest banks.
"There are only about two weeks left before the end of the year, so it's not that likely that the central bank will announce or implement further RRR hikes. That's why it is choosing to extend the selective ratios," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.
The decision to extend the selective reserve requirement increase will lock up about 180 billion yuan ($27 billion) in deposits that the banks would otherwise have had available to lend.
Consumer prices soared past forecasts to a 28-month high in November and showed signs of spreading beyond food prices, putting pressure on the government to ratchet up its monetary tightening.
China officially raised banks' required reserves for the third time in a month on Friday. It has used selective increases twice this year, targeting banks that have been especially heavy lenders or that are systemically important.
All the economists' spotlights are on China. China is trying to cool down the inflation and this regulation will decrease the money Chinese can spend. I am curious how this campaign will affect other counties, especially America, knowing that Chinese and American economies are intimately related.
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