Hey Look!! A seldom use Monetary Policy Tool is Used...What a GREAT DAY!

The Peoples Bank of China (PBOC) utilizes the Monetary Policy tool of Required Reserve Ratio that our  Federal Reserve Bank seldom (by seldom, I mean decades) uses to control the nations money supply.  The Required Reserves Ratio (RRR) is a numerical percentage that the Federal Reserve requires bank to withold on EACH deposit they recieve from depositors. 

Starting Monday, most Chinese commercial banks will be required to put 16% (In US it is 10%) of their deposits on reserve, an increase of a half percentage point. In recent years, the reserve-requirement rate has emerged as a primary tool for the central bank to fine-tune monetary policy.

Example: If the RRR is 10% and a bank recieves a $1,000 deposit the bank must withold $100 in an account with the Federal Reserve Bank. The bank can then loan the remaining $900 (called "Excess Reserves") to customers to buy "stuff".  If the Federal Reserve Bank wants to slow down lending, hence the purchasing of "stuff", then they RAISE the RRR so banks withold more and lend out less.  More specifically, the bank has LESS to lend out and therefore INCREASES the interest rate they loan the money out for.  This is done in times of inflation, or pending inflation, to put a damper on the borrowing for consumer purchasing and speculation by investors.  This tends to stabilize prices.

"The People's Bank of China said it will raise the percentage of deposits that banks must keep in reserve and can't lend, a shift intended to stave off inflation and the asset bubbles that can accompany it..."

Restraining investment to curb inflation is a balancing act that all Central Banks in the world have to face.  If you hit the brakes too fast to address inflation, you risk setbacks in economic growth and employment.  If you dont throttle back on the money supply then inflation becomes an issue.  The Chinese are taking a gamble to get out in front of inflation.

With an economy that is led largely by investment, China faces a balancing act in bringing down lending without choking off growth. It has also proved easier to spur banks to increase lending than decrease it.

The US Federal Reserve has yet to committ to contracting the money supply that has been so generously increased in the past year or so.  We are not in observable recovery, so putting the brakes on now would be counter-productive and risk a "double-dip" recession...