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China hikes bank reserves to cool inflation

China's central bank increased the reserve requirement ratio for its commercial banks by another 50 basis points on Thursday, extending its campaign to calm prices despite initial signs of slowing in the economy.

The increase, the eighth since October, will raise the reserve requirement ratio to a record 21 per cent for China's biggest banks.

The increase will take effect from May 18, the central bank said in a terse statement on its website.

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By forcing banks to lock up deposits they would otherwise have lent, China hopes to drain its economy of excess money, one of the main drivers of high inflation.

"The central bank is moving the deposit reserve ratio again to soak up liquidity as hot money inflows and current account surplus remain large," said Xu Biao, an economist with China Merchants Bank in Shenzhen.

The central bank sold 40 billion yuan ($6.2-billion U.S.) of three-year bills in regular open market operations on Thursday as apart of its efforts to mop up excessive cash in the economy.

China's factory output growth in April eased much more than expected, government data showed on Wednesday, suggesting the economy is cooling even as inflation remains stubbornly high at 5.3 per cent in the year to April.

Policy makers, targeting 4 per cent average inflation for 2011, have declared inflation-fighting their top priority this year after high food prices raised fears of broader inflation that could destabilize the economy or even spark social unrest.

A wall of cash from foreign direct investment, China's gaping trade surplus, and maturing central bank bills and repos, is set to pour into China in coming weeks and months.

Analysts expected China to raise the reserve requirement ratio to 21.5 per cent by December, a Reuters poll in April showed.

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