The People Bank of China decided to raise on July 6th the basic interest rate for one year lending by 0.25 percent points to 6.56%; this is the fourth rate raise this year. One of the prime reasons was to curb the rising inflation rate of China in 2011, which is, as of May 2011, at 5.5% on a yearly scale, well above the Chinese government’s target inflation of 4% (Y-2-Y).
A couple of weeks ago, the PBC also raised the reserve requirements ratio of commercial banks in China by 0.5 percent points to 21.5%. This is the fifth raise during 2011. This is one of the tools that the PBC uses to curb the growing new loans given by banks and the soaring inflation rate.
The broad money base (M2) of China is still very high and stood by the end of May on 76.34 trillion Yuan, which is an increase of 15.1% (Y-2-Y), but was 0.2 percent points lower from April 2011 and lower by 5.9% compared to May 2010.
The new loans given by banks during May reached by the end of May 54 trillion Yuan, an increase of 551.6 billion Yuan compared to April 2011; this is an increase of 16.9% in annual terms.
These figures indicate that the Chinese economy is still growing but at a slower pace; the recent changes done by the PBC are likely to further slowdown the economic activity in China and will eventually curb its high rate of inflation.
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