If the spiral of credit growth and investment expansion cannot be checked in a timely fashion, the country's efforts to cool economic growth and its long-term attempts to shift from extensive growth to balanced and sustainable growth will be seriously undermined.
In April, the central bank raised its benchmark lending rate for the first time in two years to tighten credit. But the persistent surge in bank loans and investment in May requires more tightening measures to take place.
Higher interest rates are usually thought to be the most effective way to adjust money supply. Yet, it is obvious why the central bank has decided against this course of action.
Domestically, in spite of its growth momentum in recent months, the consumer price index, the main gauge of inflation, remained as low as 1.4 per cent in May. The monetary authorities need more time to understand and respond to inflationary pressures.
Internationally, an interest rate rise will more than likely add to the appreciation pressure on the renminbi by inviting more capital inflows. China's record trade surplus achieved in May has already given rise to such revaluation calls.
Under such circumstances, the central bank's move to raise the reserve ratio should be interpreted as a display of the monetary authorities' firm resolution to slow credit growth and thus cool investment expansion.
All commercial banks and local governments and investors should take this message to heart.
