Fearful of rising inflation and abundant liquidity, the People's Bank of China has just announced yet another increase by 50 basis points reserve requirements to 19.5%. In a speech immediately after the decision, the chairman of the NSC Zhou reiterated that the central bank will continue to use a combination of exchange rates, interest rates and higher reserve requirements to curb accelerating inflation. The People's Bank of China increased its key interest rate only 10 days ago. At night, the NSC has established an official rate of the yuan at 6.5781, the highest level since the peg to the dollar, which ended six years ago. Inflation remains the single most important issue in China right now, and authorities will use all its policy instruments to cope with this problem. We can expect in the coming months, a combination of further rise in interest rates and the gradual appreciation of the yuan.
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