Reserve requirement ratio higher

Updated: 2007-07-31 00:59

BEIJING -- China will raise the reserve requirement ratio by half a percentage point to 12 percent for commercial banks from August 15, the People's Bank of China (PBOC) announced on Monday.

"The move does not come as a surprise seeing as almost every economic index is overheating," said Song Guoqing, an economist with Beijing University.

"However, half a percentage points is not enough -- it can't even absorb the newly-added foreign exchange reserves," Song added.

"China's forex reserves go up by about 30 billion U.S. dollars a month while loans of commercial banks totaled 25 trillion yuan at the end of June," Song explained. "This means that a half-percentage point rise can only absorb 125 billion yuan a month."

China's gross domestic product (GDP) rose 11.5 percent in the first half, after it grew 11.9 percent in the second quarter, according to official data.

This is the sixth time China has raised the reserve requirement ratio to curb China's excess liquidity, following an interest rate hike announced last Friday in which China raised the one-year benchmark deposit and lending rates by 27 basis points to 3.33 percent and 6.84 percent respectively.

Meanwhile, the State Council, or cabinet, announced last Friday the reduction of tax on the interest on personal bank savings from 20 to five percent from August 15.

However, the measures, aimed at curbing excessive liquidity, were absorbed surprisingly quickly by the stock markets. Despite the interest hike and tax cut, the country's stock markets kept rising this week when other stock markets fell.

On Monday, the benchmark Shanghai Composite Index hit a record 4,440.77 points while the Shenzhen Component Index closed hit a record 15,060.86 points

"The measures just can't catch up with the overshooting economy," Song said, "so there will be more policies coming out."

The central bank said the move was aimed at "strengthening management of liquidity in the banking system and rationalizing lending growth".

PBOC statistics show that China's foreign exchange reserve reached 1.33 trillion U.S. dollars at the end of June, up 41.6 percent on the same period last year.

A total of 266.3 billion U.S. dollars was added to the country's foreign exchange reserve in the first half, 144 billion U.S. dollars more than a year ago, said the central bank.

The six-month rise is higher than the whole-year rise of 247.3 billion U.S. dollars in 2006.

Guo Tianyong, director of the Chinese Banking Research Center in the Central University of Finance and Economics, said higher deposit reserve ratios are an effective means of retrenching capital held by banks, so as to limit the growth of bank loans and curb excess liquidity.

According to the central bank, China's commercial banks lent up to 2.5 trillion yuan (329 billion dollars) in the first half of the year, approaching 80 percent of last year's total. In June alone, these banks approved loans valued at 451.5 billion yuan (59.4 billion dollars).

The central bank has raised the benchmark interest rate of RMB deposits and loans three times this year.

The central bank said in a statement released early this month that it will maintain its prudent monetary policies, tighten control over bank liquidity to maintain a proper liquidity level and prevent excessive growth in monetary credit.

With the rising inflation in the first half year, many agencies predicted that more control policies will be carried out to prevent overheating of China's economic growth in the second half.

Ten agencies including City Group, Beijing University and several securities companies have forecast that China's economic growth rate could hit 11.8 percent in the third quarter, with the CPI up 4.5 percent. (One U.S. dollar is equal to 7.58 yuan)

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