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China raises bank deposit reserve ratio, 04/2007

By Xin Zhiming (China Daily)
Updated: 2007-04-06 09:22

The central bank raised the reserve requirement ratio for banks by 0.5 percentage point yesterday to mop up excess liquidity resulting from a soaring trade surplus and increased money supply.

After the increase, which will take effect on April 16, the ratio will be 10.5 percent for big bankers and 11 percent for smaller lenders.

It is the third time this year the People's Bank of China has raised the ratio after similar rises in January and February.

The bank reserve requirement refers to deposits banks are required to set aside as a reserve, which reduces their lending ability.

"The move is directly aimed at mopping up excess liquidity," Zhao Xijun, finance professor at Renmin University of China, told China Daily, adding the ultimate objective is to maintain stable growth of the economy.

In recent months, the trade surplus has expanded rapidly and money supply remained at a high.

In the first two months, China's trade surplus amounted to $39.61 billion, a stunning jump of 230 percent over the same period last year.

In February, M1, or cash in circulation and deposits, increased 21 percent year on year, a record high for the past 37 months, indicating increased liquidity pressure.

Meanwhile, banks have accumulated 11.1 trillion yuan ($1.44 trillion) of idle funds that can be used for lending.

In January and February, domestic banks extended new loans of 982 billion yuan ($127 billion), about 260 billion ($33.6 billion) more than a year ago.

As a result, urban fixed-asset investment has picked up to 23.4 percent year on year in the January-February period from about 20 percent in the fourth quarter of last year, reversing the trend of a slight slowdown since last July.

On another front, the consumer price index rose to 2.7 percent, close to the warning line of 3 percent, in February.

"The central bank has been closely monitoring the growth trends of the economy and is taking preemptive measures to keep it on the right track," said Zhao.

Such a strategy is different from past years, when it seemed to have resorted to rather drastic measures to seek instant regulatory effect, said Zhao.

The central bank raised interest rates three times in the past year; the most recent of which came into effect on March 18.

Tang Min, chief economist with the Asian Development Bank in China, said yesterday that the adjustment in the reserve requirement ratio may be followed by another hike in the interest rate.