China's central bank raised the amount of foreign currencies that lenders
must keep as reserves, seeking to cool the world's fastest-growing major
Banks must keep 5 percent of their foreign-currency deposits as reserves
starting May 15, up from 4 percent, according to a People's Bank of China
circular to lenders. The increase will remove about $1.7 billion from the
The decision will make less of the $165 billion of foreign- currency deposits
as of March 31 available for lending and investment in the stock market, which
surged to a record Tuesday. It may also ease pressure for appreciation of the
Chinese yuan, which has gained 7.5 percent since July, 2005.
"The central bank probably wants to curb excess liquidity and indirectly ease
the pressure on the yuan to rise," said Guo Zhaoyang, a foreign-exchange analyst
at China Everbright Bank in Guangzhou. "Too many people may have converted their
foreign currencies blindly into the yuan."
China's currency reserves surged by a record $136 billion in the first
quarter to $1.2 trillion, partly as banks converted proceeds of overseas initial
public offerings into yuan. There was a "rush" to bring home cash after Chinese
companies raised nearly $60 billion from IPOs last year, twice as much as in
2005, HSBC Holdings Plc wrote in an April 18 report.
The People's Bank of China said it hadn't issued a public statement
concerning a change in reserve requirements. The circular came after the central
bank on April 29 raised banks' local currency reserve requirement ratio for the
seventh time in 11 months.
The benchmark CSI 300 Index of yuan-denominated A-shares, which tracks
yuan-denominated A shares listed on China's two exchanges, rose 3.6 percent to
close at a record 3686.03.
The yuan closed above 7.70 for the first time since the end of a fixed
exchange rate to the dollar in July 2005. The currency gained 0.1 percent to
7.6960 against the dollar at 5:30 p.m., according to the China Foreign Exchange
"The bigger news is what's going on with the yuan, given they accelerated the
pace of appreciation today," said Steve Rowles, an analyst with CFC Seymour Ltd.
in Hong Kong. "The story is inflation could be just coming into the China market
and a stronger currency could help tackle that."
Rowles said the figure may also suggest data due out in coming days will be
stronger than economists expect, pointing to "overheating." China's trade
surplus probably rose to $15 billion in April, according the Bloomberg News
survey. That would be up from $10.4 billion in the same period last year. The
government may release the trade figures as early as this week.