China raised banks’ reserve ratio requirements on Sunday, the fourth time this year that Beijing has used this tool to tighten liquidity. The move underscores Beijing’s commitment to monetary tightening at a time when other economies, including the European Central Bank, are also beginning monetary tightening.
China’s central bank said it was raising the reserves that commercial banks must deposit with the central bank to 20.5 per cent, an increase of 50 basis points, with effect from April 21.
Controlling inflation is China’s top economic priority this year, but monthly inflation data have remained high despite several rounds of tightening. March’s consumer price index rose to 5.4 per cent, the highest level in nearly three years.
The move by the People’s Bank of China came after Tim Geithner, US Treasury secretary, attacked the International Monetary Fund’s failure to use its existing tools to tackle China’s tightly managed exchange rate.
An alternative policy option for China to tackle its domestic inflation is allowing a greater appreciation in the renminbi. But comments to the IMF’s governing body in Washington over the weekend highlighted the divisions between developed and developing countries on the causes of imbalances in the global economy.
The gulf between these countries’ policy recommendations suggest the G20 process to iron out economic imbalances will run into trouble once the group discusses substantive issues rather than process.
Speaking to the International Monetary and Financial Committee, the IMF’s governing body, Mr Geithner hit out at a “few emerging markets” that manage their exchange rates. His words can refer only to China but reflect a US feeling that it has made progress on the renminbi but not the international system.
“The current system of exchange rates is an obstacle to effective international co-operation on imbalances,” he said, blaming China’s exchange rate policy for capital flows that push up the exchange rates of those emerging economies that do allow foreign funds in. Having received criticism from the IMF over US fiscal policy last week, Mr Geithner turned the tables and accused the fund of failing to use existing powers to put greater pressure on China.
“The fund has the requisite tools within the existing framework of the IMF Articles of Agreement – but they have not been sufficiently utilised, as suggested by the IMF’s Independent Evaluation Office,” Mr Geithner said.
Even though most G20 officials agreed with Christian Noyer, governor of the French central bank, that there had been “no fights” at the G20 meeting, that was because the body focused on issues of process rather than substance.
