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China lifts bank reserve levels in inflation fight

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China lifts bank reserve levels in inflation fight
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Inflation in China hit its fastest pace in almost three years in May forcing the government to again raise the amount that the country’s banks must keep in reserve.

Food prices were the biggest driver, but even with those stripped out, inflation was 2.9 percent up on the same month last year. That is the highest level since records began in 2002.

The overall inflation rate was 5.5 percent: China’s central bank is trying to achieve average inflation this year of four percent, but given that it has been close to or above five percent every month so far that is not looking likely.

Economist Shen Jianguang of Mizuho Securities said this is a long term problem: “We’ve had very rapid monetary expansion in the past two years, plus imported inflation and food price inflation. It all came together, so that’s really the reason behind China’s rising inflation. So it’s a trend, not just some short term effect.”

China’s central bank has just increased the amount big banks have to put aside, which locks up funds that could otherwise be loaned out and so fuel inflation.

It is the ninth time since October it has raised the reserve requirements.

It has also put up interest rates four times during that period.