In May 2nd, the people's Bank of China decided to raise the deposit reserve ratio by 50 basis points again from May 10th. This is the third time that the central bank has raised the deposit reserve rate this year. After this increase, the deposit reserve ratio of China's large banks has reached 17%, which is also very small compared with the 17.5% high in the three quarter of 2008. In other words, the central bank's reserve requirement rate will go back to its all-time high once the reserve requirement rate is raised again.

Under the background of rising inflation pressure and rising expectations of RMB appreciation, the Central Bank of China intends to regulate excess liquidity among banks through adjusting the deposit reserve ratio in order to control strong bank credit and continuously strengthen inflation expectations.

Meanwhile, the strong PMI data just released in May also reflected signs of overheating in China's economy. Under such circumstances, the necessity for central banks to shrink liquidity is also increasing.

We also expect that the preliminary statistics of credit data in April have exceeded the expectations of the central bank, which has led to the central bank's choice to use the reserve requirement in the May 1 holiday.

However, we believe that the central bank should still use monetary means such as interest rates to tighten monetary policy.

Although quantity regulation can control credit growth, it can not control the strong demand.

If demand remains the current trend, China's inflation pressure will soon appear in the future. Therefore, we believe that China's macro management authorities should use more policy tools to cool down the macro-economy.

We also believe that in the face of strong inflation expectations and the bubble of the real estate market, China needs to raise the policy interest rate, rather than delay the use of price means because of the pressure on RMB appreciation to raise interest rates.