The People's Bank of China, China's central bank, raised banks' deposit
reserve ratio Tuesday by 0.5 percentage points to rein in excessive bank
lending.
The hike brings the reserves that most banks are required to deposit with the
central bank to 8.5 percent. The central bank raised the bank deposit reserve
ratio by the same margin of 0.5 percentage points in June.
The central bank expects the two hikes - one percentage point in total - will
take 300 billion yuan out of circulation.
"The move aims to tighten up banks' liquidity management, curb the excessive
growth of money and credit and maintain the development of the economy," said
the central bank in a statement posted on its website.
The move came as a surprise to many economists, who have been calling on the
central bank to raise interest rates to reduce the money available for
investment and prevent possible overheating of the economy.
China's economy surged 10.9 percent in the first half of 2006, the fastest
growth in a decade and higher than the targeted annual growth rate of eight
percent set by the government for this year.
The economy continues to roar ahead despite a slew of measures imposed by the
government to ease the blistering growth of investment.
China's commercial banks lent 2.34 trillion yuan in the first seven months of
the year, consuming 94 percent of their annual loan quota, according to
statistics from the People's Bank of China.
New loans, which had dropped in June, picked up speed again in July despite
government efforts to curb the money supply and tighten credit. In July alone
banks lent 171.8 billion yuan.
Economists attributed the excessive growth to loose liquidity, which
contributes to an unbalanced economic structure and could cause hiccups in the
economy.
Ha Jiming, chief economist of China International Capital Corporation Limited
(CICC), expected the central bank to further raise the deposit reserve ratio by
the end of this year to cool down the economy.
Some economists, however, suggest the central bank raise the benchmark
interest rate, which is a more stringent means of reining in excessive loans.
Tang Min, chief economist with the China Mission of the Asian Development
Bank (ADB), said he expects China to raise its interest rates soon.
"The overheating of the economy has become more and more obvious in the first
six months of the year. The country needs to raise interest rates to solve the
problem," he said.
The government has vowed to slow down the surge in fixed assets investment in
sectors troubled by overcapacity and to control excessive money and credit
supply but it seems to be very cautious about raising interest rates.
The last time the central bank adjusted interest rates was on April 27, when
it raised the benchmark one-year loan interest rate from 5.58 percent to 5.85
percent, but did not change the rate for deposits.
Analysts said a higher interest rate on deposits may help curb excessive
investment, but would also discourage consumption and investment in stock
markets, which the government has been working hard to encourage so as to
sustain economic development over the long term.