China's reserve ratio hike is expected to ease mounting pressure on the country's interest rate as it is likely to help absorb liquidity from the market, an analyst said Tuesday.
China's central bank on Monday raised the reserve requirement ratio for the country's six largest commercial lenders by 50 basis points to 17.5 percent for the next two months.
The reserve ratio refers to the percentage of customer deposits that banks are required to set aside in cash. If the central bank increases the ratio, local commercial banks will have less room in extending loans.
"Since 2009, China's monetary policy has been dependent on quantitative easing, such as reserve ratio hikes and open market operations, rather than raising interest rates," said Oh Seung-hoon, a global strategist for Daishin Securities Co.
Oh explained that the Chinese government's recent move seems to be aimed at slowing down the speed of the money supply in the world's second-largest economy.
"China appears to be trying to keep market expectation about inflation or interest rate hike under control," he said.
It is the fourth time this year that China has raised its banks' reserve ratio.
The six banks include the four major state-owned lenders -- Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China. The other two lenders are China Merchants Bank and China Minsheng Banking Corp.
Beijing continues to maintain its loose monetary policy it introduced during the global economic slowdown. In late 2008, the government pumped 4 trillion yuan (US$590.2 billion) into the market to counter the global crisis.
Some market watchers have raised concerns that prices for consumers are continuously rising as the cheap money policy has led to increased market liquidity.
Growth of the country's money supply has been accelerating and real estate prices have been rising at double-digit rates.