The major reason is that the central bank has to withdraw a large amount of excess liquidity because of fast growth of foreign exchange reserves, To do so, if the central bank only issue CB bills without any other measure, it has to raise the interest rates on CB bills to a very high level given strong economic expansion momentum and commercial banks’ wide interest rate differentials which is larger than the returns on CB bills, however, high interest rate would have significant implications on the economy.
In contrast, the 1 pp rise of required reserve ratio enabled the central bank to reduced at a lower cost the commercial banks’ excess reserve by around RMB150 billion yuan, accounting for only 6% of their holdings of treasury bills, financial bonds and CB bills. Therefore, the required reserve ratio hike is actually a mild policy measure.