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By Xin Zhiming (China Daily)
Updated: 2007-07-31 08:40

The central bank yesterday raised the amount that lenders must hold in reserve by 0.5 percentage point for the sixth time this year.

The increase in the banks' reserve requirement ratio will take effect from August 15, the People's Bank of China, the central bank, said in a statement on its website.

The ratio will reach 12 percent for big lenders after the adjustment.

The move is not surprising, analysts said, after the release of macroeconomic data for the first half of this year.

"It is aimed to control money supply," said Zhu Baoliang, chief economist with the State Information Center (SIC).

Boosted by ample liquidity, China registered gross domestic product growth of 11.5 percent for the first six months, during which fixed-asset investment rose by 25.9 percent. Lending grew by 16.5 percent year on year.

The central government has vowed to prevent the economy from overheating; and the central bank said the hike in the reserve requirements was aimed at "strengthening management of liquidity in the banking system and control excessive growth in money supply and credit".

The broad measure of money supply, or M2, grew by 17.1 percent year on year in June, which was higher than the target of 16 percent set by the central bank for this year.

The latest step follows the raising of benchmark interest rates by 0.27 percentage point on July 20 and cutting the tax on interest income from 20 percent to 5 percent in a coordinated move to reduce liquidity and stabilize the blistering economy.

"The liquidity situation has become more and more serious," said Zhao Xijun, finance professor at Renmin University of China.

The trade surplus jumped 83 percent to $112.5 billion in the first six months while foreign exchange reserves swelled to $1.3 trillion. The money supply, if not contained, will spill into the economy and lead to a pick-up in prices, including asset prices, and investment, said Zhao.

The authorities can resort to issue of central bank bills and hikes in the reserve requirements to ease the problem, but they are not limitless, Zhao told China Daily.

"We cannot raise the ratio continually and it has a cap."

The 0.5 percentage point hike in the banks' reserve requirement ratio is expected to absorb as much as 150 billion yuan ($19.8 billion). "It will play a role in reducing liquidity," said SIC's Zhu.

But Renmin University's Zhao said the country will ultimately need to reduce its foreign trade surplus.

The government has started to reduce or remove export rebates for more than 2,800 products, effective from July 1, in an effort to dampen exports and narrow the trade surplus.

Zhao also suggested that the corporate bond market be promoted so that enterprises can issue bonds more easily to raise capital.

"This will also help cut liquidity in the market."

Currently, the corporate bond market is estimated to account for only a very small slice of the capital market. "It is almost negligible," Zhao said.

The central bank has also raised interest rates thrice this year.