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Bank reserve ratio up to curb liquidity

By Xin Zhiming (China Daily)
Updated: 2007-04-30 08:37

China's central bank yesterday ordered commercial banks to hold more funds in reserve to help mop up excess liquidity.

The People's Bank of China raised the reserve requirement ratio for banks by a 0.5 percentage point yesterday the fourth this year and the second this month.

The move, which raised the ratio to 11 percent for big lenders, will take effect on May 15, the central bank announced on its website.

By requiring the banks to hold more of their deposits in reserve, policymakers aimed to stop excess liquidity and curb fast-rising credit and investment growth, Zhao Xijun, finance professor with Renmin University of China, told China Daily yesterday.

It is an important task for the country to control liquidity as money supply increased rapidly in the first quarter, he said.

The gross domestic product, lending, consumer price index growth figures were also prompting curbs, he added.

China's annual growth in M2, or broad measurement of money supply, edged down to 17.3 percent by the end of March from 17.8 percent in February, but it still broke the target line of 16 percent set by the central bank early this year.

Yuan lending rose to 23.96 trillion ($3.1 trillion) at the end of March, up 16.25 percent year-on-year and 1.52 percentage points higher than that for the same period of last year.

The CPI grew by 3.3 percent in March and 2.7 percent in the first quarter year-on-year. China set 3 percent as the alarm line for the index.

"The liquidity boom is spilling over to the asset market ... and strict measures are needed to stop it from worsening," Zhao said.

After the release of those figures in the middle of April, economists said that policymakers could raise the benchmark interest rate soon, possibly before May.

But the shift to raising the deposit requirement ratio shows the central bank is concerned about excess liquidity more than inflation, Shen Minggao, economist with the Citigroup in Beijing, said.

Gao Shanwen, chief economist with the Anxin Securities, said the central bank chose to raise the ratio instead of the interest rate because inflation is not yet unacceptably high.

"The data on CPI, PPI (producer price index) and investment (in the first quarter) are all in an acceptable range."

Gao said inflation had been driven mainly by temporary grain price rises, and it will start to fall in July after peaking in the second quarter, invalidating an interest rate adjustment.

Zhong Wei, an economist with Beijing Normal University, said the reserve ratio is expected to rise further, but it is not the best option since it will affect the operation of commercial banks.

The latest rise in the deposit requirement ratio will mop up about 150 billion yuan ($19.4 billion). It was the seventh increase since June 2006.

However, economists doubted that the move alone will effectively curb excess liquidity.

Ha Jiming, chief economist with the China International Capital Corporation, said it is not the "fundamental" measure for mopping up liquidity, although it will help.

"Only raising the interest rate can make a substantial difference," he said.

The central bank has raised interest rates three times in the last year, the last on March 17.