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Bank reserve ratio raised to cool investment

(Agencies)
Updated: 2007-04-29 13:46

 

A man walks past a billboard for a new property development being erected in Beijing April 24, 2006. The central bank is to raise the reserve ratio of the commercial banks by 0.5 percentage points to 11% in a bid to cool the investment boom. [Reuters]

China raised the amount of money banks must hold in reserve for the fourth time this year Sunday, reducing the amount available for lending in a new effort to cool an investment boom.

The order by the country's central bank comes on top of repeated interest rate hikes and investment curbs imposed on real estate, auto manufacturing and other industries over the past year. The effort has had limited success in slowing the growth of investment.

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The amount of reserves that lenders must keep with the central bank was raised 0.5 percentage point to 11 percent of their deposits, the People's Bank of China said. The increase takes effect May 15.

"(The increase) is aimed at stepping up liquidity management of the banking system and to guide a reasonable growth of credit," the bank said on its Web site.

Beijing has raised the bank reserve ratio seven times over the past year, each time by 0.5 percentage point. It stood at 7.5 percent of deposits before the first increase last June. The last increase was April 16.

The bank is trying to contain a boom in lending and real estate development that the government worries could ignite inflation or a debt crisis.

Earlier this month, China announced that the economy surged 11.1 percent in the first quarter of this year, prompting the government to say it would take steps to keep the economy from overheating.

The consumer price index rose 3.3 percent in March, data showed, above the government's 3 percent target. And fixed-asset investment countrywide grew a robust 23.7 percent during March.

The move also showed the central bank's determination to continue to tighten liquidity management, a major problem threatening China's economy.

Last year the economy grew 10.7 percent - the highest rate since 1995.

The central bank said it was still worried about China's international balance of payments problem, which is boosting the excessive liquidity.

The trade surplus hit a record US$177.5 billion in 2006, up 74 percent from the previous year, straining ties with Washington and other trade partners who say Beijing has not done enough to let its currency appreciate.

China's foreign exchange reserve reached US$1.2 trillion by the end of March, up 37.36 percent from the same period last year, maintaining the largest in the world since the end of February 2006.

Li Xiaochao, spokesman of the National Bureau of Statistics, said recently that China's economy faces the risk of shifting from relatively fast growth to over-heating.

Li acknowledged that the Chinese government would take more small steps rather than drastic cooling measures to ensure a stable and fast economic growth.