PBOC may drain more capital from financial system

By Chen Jia (China Daily)
Updated: 2011-04-20 13:00
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BEIJING - There is still room to raise the amount of money that banks must hold to curb excessive liquidity, as taming inflation has become the No 1 priority of monetary policies, Hu Xiaolian, deputy governor of the People's Bank of China (PBOC), said in an article released on Tuesday.

"Because of the continued inflows of foreign currency, the nation's pressure from the excessive liquidity remains high," Hu said in the article on the website of the central bank, which was based on her speech at a forum on Friday.

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She said the central bank may continue to tighten liquidity by using leverages of interest rates and required reserve ratios, as well as controlling money supply, in order to cool the inflation.

China raised banks' required reserves by 50 basis points to 20.5 percent on Sunday, the 10th increase since the beginning of 2010. It also raised interest rates on April 5, the fourth time since October.

"To improve the renminbi exchange rate mechanism and enhance the flexibility of the exchange rates can also help to ease imported inflation pressure," Hu said.

Zhou Xiaochuan, the central bank governor, said on Monday that the central bank needs to maintain a tight monetary policy and reduce an "excessive" accumulation of foreign-exchange reserves. China's foreign exchange reserves increased to $3 trillion in March.

China saw a 32-month high Consumer Price Index of 5.4 percent in March. Liquidity has become one of the most significant agitators of the nation's high consumer prices, analysts said.

Concerned about the excessive lending from banks, Zhou suggested local governments study raising money from bonds and property tax for municipal infrastructure construction, to reduce potential credit risks from overheated real estate markets.

By the end of November in 2010, loans to the country's local governments stood at 9.09 trillion yuan ($1.39 trillion), accounting for 19.16 percent of the total yuan-denominated loans, said a report from the 21st Century Business Herald.