The eighth hike of required reserve ratio for commercial lenders this year that the central bank announced on Saturday marks a prompt reaction to excessive liquidity growth driven by China's rapid accumulation of foreign exchange reserves.

To rein in the expansion of the country's foreign exchange reserves, such a move to soak up extra money supply is needed, but not enough. Policymakers should come up with more tightening measures to slow growth of the trade surplus and foreign direct investment, the main drivers behind China's ballooning foreign exchange reserves.

Latest statistics show China's foreign exchange reserves, already the world's largest, rose to a record high of $1.43 trillion at the end of September, and the People's Bank of China almost immediately increased the reserve requirement for domestic banks.

Commercial lenders must set aside 13 percent of deposits as reserves from October 25, up from 12.5 percent. Though the new required ratio is the highest in almost a decade, it is much needed for the country to curb the fastest inflation in 10 years.

By mopping up some liquidity from the domestic market, the central bank's new move may help cool speculation in stocks and real estate and keep the overall financial situation stable.

However, to address the root cause of a ballooning foreign exchange reserve that keeps pumping liquidity into the national economy firing on all cylinders, policymakers must take more effective measures to slow growth of the trade surplus.

China's trade surplus surged 69 percent in the first nine months from a year earlier to $185.65 billion, topping the $177.5 billion record for all of 2006. The nation chalked up a trade surplus of $23.9 billion in September, up 56 percent from a year earlier, but lower than August's $25 billion.

The fact that the monthly trade surplus dropped in September might be a desirable result of the country's macroeconomic control policies aimed at cutting the surplus by reducing export tax rebates and encouraging the import of high-tech and materials. But it is far from a cause for optimism as this monthly trade surplus remains so high while protectionism against Chinese exports is climbing in other countries.

The government recently cut import tariffs on audio and video products and other electronic publications to help reduce the country's trade surplus and rebalance its international payments.

(China Daily 10/15/2007 page4)