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
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
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
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
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