China's central bank Friday ordered banks to set aside an additional 0.5 percent of their deposits from Nov. 29, the fifth such hike this year and the second increase this month.
The People's Bank of China said the move was aimed at "enhancing liquidity management and moderately regulating credit supply." The increase was estimated to freeze liquidity of about 300 billion yuan (44.8 billion U.S. dollars).
The reserve requirement ratio (NYSE:RRR) for the four big state-owned banks -- the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China -- will stand at 18.5 percent once the rise takes effect.
Friday's move will raise the deposit reserve ratio for other large financial institutions to 18 percent and for small and medium-sized institutions to 16 percent.
Analysts said the increase exceeded forecasts as it targeted over-liquidity in the banking system and looming hot money inflows caused by the United States' quantitative easing policy.
"The PBOC is under pressure, and it needs to do something to show its determination to tame inflation. However, it has no intention to kill growth by aggressively hiking interest rates or imposing a lending squeeze," said Lu Ting, China economist at the Bank of America-Merrill Lynch.
"Hiking the RRR is the natural choice of the PBOC," Lu said in an e-mailed note to clients.
China's economic growth rate was likely to slow in the fourth quarter to 8.7 percent, mainly as a result of economic restructuring, the State Information Center (SIC) said Friday.
The forecast was almost 1 percentage point lower than the third quarter's 9.6-percent growth rate, but the SIC expected the economy to grow by 10 percent for the full year on the back of a 10.6-percent growth rate for the first three quarters.
The central bank, on Nov. 10, announced a 50-basis-point rise of the RRR for Chinese financial institutions that accept deposits from Nov. 16, as China's consumer price index (NYSEARCA:CPI), a main gauge of inflation, soared to a 25-month high of 4.4 percent year on year in October.
Prices of meat have risen for the week ending Nov. 14, with prices of pork up 1.6 percent and mutton 0.5 percent. Prices of eggs also rose 0.9 percent, while rice rose 0.6 percent and flour 0.4 percent, according to a weekly report by the Ministry of Commerce.
The report said prices of 18 types of vegetables were slightly lower, down by 0.8 percent compared to the previous week. However, on a year-on-year basis, the prices of 18 staple vegetables in the first 10 days this month were still significantly higher from a year earlier.
The State Council, the Cabinet, Wednesday announced price control guidelines to reassure consumers facing rising inflation and urged local authorities to offer temporary subsidies to needy families.
The market had been expecting an increase, but did not anticipate it would come so soon, said Tan Yaling, senior analyst at Bank of China.
She said the central bank would not raise the benchmark interest rates soon after the ratio hike as higher interest rates would further expand the interest rate differences between China and other major economies, which would lead to the influx of hot money.
The central bank's decision to raise the RRR, instead of interest rates, was because a higher RRR would have "a direct effect on withdrawing liquidity," said Yan Wei, chief economist with the Orient Securities.
The decision was announced after Chinese stock markets edged up following a period of decline of up to 10 percent of their value, largely on concerns of tighter policies.
The benchmark Shanghai Composite Index rose 0.81 percent to close at 2,888.57. The Shenzhen Component Index closed up 1.23 percent to end at 12,295.85.