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PBOC may again raise reserve ratio in mid-May

By Song Jingli (chinadaily.com.cn)
Updated: 2011-04-22 13:50
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The possibility of raising the required reserve ratio (RRR) in the middle of May is high, China Securities News reported, citing analyst Lin Songli.

China's funds outstanding for foreign exchange surged 90.15 percent month on month to 407.91 trillion yuan in March, according to the People's Bank of China (PBOC), the central bank.

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This figure was beyond market expectations. The unexpected data may account for PBOC's RRR hike on April 17, when the central bank had realized net withdrawal of money from the open market.

The central bank has to buy foreign exchanges with its local currency, the yuan, resulting in a massive increase of funds outstanding for foreign exchange.

Funds outstanding for foreign exchange in the first quarter accumulated to 1.1 trillion yuan. This happened when China reported first quarter trade deficit of $1.02 billion, its first quarterly deficit in seven years. This may be evidence that hot money was entering China.

Guosen Securities analyst Lin Songli believes China still faces a high likelihood of an inflow of hot money over a long period of time. This may press the central bank to further withdraw liquidity, he added.

As for when the hike will come, Lin noted the central bank raises RRR typically after the National Bureau of Statistics releases economy data and all of these hikes appeared in the middle of a certain month.

Lin said the timing is not accidental, but necessary.

Lin reasoned that banks might be short of money at the end of a month, but will later gain capital gradually since funds outstanding for foreign exchange will provide more liquidity.

The central bank chose to soak up some liquidity in the middle of a month.

Lin estimated that another RRR hike will occur in the middle of May.