Since the beginning of this year, China's central bank has raised the deposit reserve ratio three times and its deposit and lending rates once.

Such frequent employment of monetary tools has been uncommon in recent years. The latest reserve ratio hike is aimed at tightening the money supply and tackling excessive banking liquidity. The banks currently have ample funds and an excessive tendency to loan money.

The National Development and Reform Commission highlighted surplus banking liquidity as a major problem in the macro-economy. Experts say the problem gives rise to ample domestic funds, adding to the difficulty of curbing overheated investment and credit and therefore causing an economic imbalance.

In other countries, the interest rate is regularly manipulated to regulate the financial market, but in China, the reality is that enterprises want to borrow and banks are eager to lend. By lifting the deposit reserve ratio we can get money back directly from the banks and restrict their lending capacity.

Interest rate hikes have occurred just as there has been a fast increase in the total supply of money. The central bank is working hard to address this. In fact, its Monetary Policy Committee established the direction of the monetary policy when it suggested increasing liquidity management at the regular first quarter meeting.

The effects of rate rises on the stock market are minimal. Some analysts fear that the central bank's decision to tighten the money supply will have a negative impact, but this is unlikely. As stock prices surge, a small increase in the deposit reserve ratio will actually help regulate funds and ensure the healthy development of the capital market.

The issue of excessive liquidity cannot be resolved in short term, and multiple polices must be put in place to address the problem, analysts say.

By People's Daily Online