China raised the amount of money banks must hold in reserve for the second
time since the start of the year on Friday, reducing the amount available for
lending in a renewed bid to cool sizzling economic growth.
The People's Bank of China, the nation's central bank, sai in its website
Friday it will raise the reserve ration on bank desposits by 0.5 percent point
on February 25. That would raise the amount of money that banks are required to
keep on deposit with the government to 10 percent of their deposits.
The People's Bank of China is trying to contain a boom in lending and real
estate development that the government worries could ignite inflation or a debt
crisis. The other reserve ratio increase this year was on January 15.
Besides increasing the deposit reserve requirement ratio, the government has
also raised interest rates to curb excessive liquidity and rapid fixed-asset
"As a general principal we expect 50 bps (basis points) reserve requirement
hikes once every quarter this year. It is an effective and cheap tool of
reducing all the liquidity in the banking system," Stephen Green, a senior
economist with Standard Chartered Bank, said in a statement.
Green said the central bank may have acted now to prepare for an expected
spike in deposits following the Lunar New Year. Cash gifts are traditionally
given in red envelopes to family and friends over the holiday.
"Move now and you can lock some of those funds up as soon as they hit the
system in the week beginning February 26th," he said.
China's economy last year grew 10.7 percent - the highest rate since
1995 - and a central bank report at the beginning of the year estimated it
would expand 9.8 this year.
The bank said it would continue to implement "a prudent monetary policy,
strengthen the liquidity management" and "guide reasonable growth of monetary
The central bank said was still worried about China's international balance
of payments problem, which is boosting the excessive liquidity. The trade
surplus jumped 67 percent in January compared to the same month last year.
It hit a record US$177.5 billion in 2006, up 74 percent from the previous
year, straining ties with Washington and other trade partners who say Beijing
has not done enough to let its currency appreciate.