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China’s Monetary Sterilization

BEIJING – Not long after the United States Federal Reserve Board announced its second round of “quantitative easing” (known as QE2), the People’s Bank of China (PBC), China’s central bank, announced two increases of 0.5 percentage points in the required reserve ratio (RRR) of bank deposits. The RRR now stands at 18.5%, a historic high, even in global terms.

While the Fed is planning to pump more money into the US economy, the PBC is trying to reduce the amount of money in circulation in China. Money used by commercial banks to satisfy the RRR, which is held in accounts at the PBC, can no longer be extended as loans. As a result, more money than ever is now frozen or inactive in China.