Expert: China has room to raise bank reserve requirement

Updated: 2008-01-18 14:36

China still has room to raise the funds its banks must hold in reserve this year, despite the requirement ratio being at a 24-year high, experts said.

China's central bank announced late on Wednesday it would raise the bank reserve requirement ratio by half a percentage point to 15 percent on January 25.

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The first raise this year followed 10 such moves last year as China sought to ease excess liquidity that is pushing the economy to the verge of overheating.

Li Huiyong, a Shenyin and Wanguo Securities senior analyst, said "the requirement ratio may rise to 19.5 percent within the year because liquidity pressure will remain high, especially in spring when there is usually an investment boom."

"The central bank will try harder to absorb liquidity and prevent credit growth from rebounding as huge amounts of central bank bills reach maturity," he said.

A record 1.27 trillion yuan ($173.97 billion) of central bank bills, which had been issued to commercial banks to curb lending, will mature in the first quarter, according to government figures.

Qu Hongbin, HSBC China chief economist, said the central bank would have to lift the requirement ratio to 19 percent this year to offset the liquidity generated by the mounting foreign exchange reserve.

The country's foreign exchange reserve reached $1.53 trillion at the end of 2007, up 43.3 percent from a year earlier. The record-high reserve may add to overflowing liquidity as it pumps more cash into circulation.

However, frequent increases in the bank reserve requirement had exerted great pressure on small- and medium-sized banks and the space for further such increases was shrinking, said Ha Jiming, China International Capital Corp Ltd chief economist.

"The requirement ratio is likely to reach 16 or 17 percent this year. But China will rely more on central bank bills to check the excessive growth of lending," he said.

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