Beijing's policy of increasing the reserve requirement ratio to curb bank lending is having an effect, said the city's central bank head.

"The excess reserves have been declining recently, particularly in March," Chief Executive of the Hong Kong Monetary Authority Joseph Yam said in his weekly column.

He noted that the excess reserve ratio fell from around 6 percent at the beginning of 2003 to an average of 3 percent in 2007, a historical low of 2 percent in March.

"The implication is that the upward adjustments in the reserve requirement ratio have become more effective in restraining credit expansion," Yam said.

As the mainland is curbing with excess liquidity by raising the reserve required ratio, the People's Bank of China has raised the ratio for 17 times in the course of a two-year monetary tightening cycle, four increases are in this year. Currently, the ratio for big banks is at a record 16.5 percent.

Yam pointed out that the observers continue to see upward adjustments to prevent the further increase in the reserve balances.

However, he said banks' profitability will be affected if Beijing keeps raising required reserves. The interest rates paid on the required reserves by central bank is low compared with the lending rate charged on commercial borrowers.

"Obviously, the commercial banks are still making impressive profits, given the fairly large net-interest margin they enjoy," he said, adding that the margin is three to four times higher than in Hong Kong.

He also added: "This is not necessarily a good thing from the macro financial-efficiency point of view."

(HK Edition 05/30/2008 page2)