Banks squeezed by reserve ratio hikes

Interbank rates have spiked to multi-year highs ahead of Chinese New Year. This partly reflects seasonal factors, but also that successive required reserve ratio (RRR) hikes are squeezing banks’ ability to lend. The trade surplus and financial inflows are still bringing in large quantities of foreign capital and, with inflation still high (and likely to rebound in January), policymakers will want to keep bank lending under control. As a result, at least one more RRR hike is likely before the end of the quarter, and another four or five over the rest of the year.