China may be showing the world how to do macroprudential regulation. Alternatively, it might be heading for a messy crash.

On Friday, the People’s Bank of China made this year’s fifth increase in the required reserve ratio, by 50 basis points to 18 per cent. This will keep Rmb350bn – the equivalent of 5 per cent of this year’s lending quota – inside the banks and out of the economy. The tightening is a response to the worrying 4.4 per cent inflation rate in October. The 10 per cent food inflation rate is of special concern, since much of the population still lives close to the edge. Anti-gouging price controls are also expected.

The government could be more aggressive. The higher RRR is expected to be followed by a 12 per cent cut in the lending target for 2011, but at Rmb6bn it would be 15 per cent of expected gross domestic product, higher than the 14 per cent ratio of 2007. The credit brakes are being tapped, not slammed.