China to raise bank reserve ratio to cool economy

Updated: 2007-07-30 20:12

China, fighting to curb excess liquidity, will raise the reserve requirement ratio by 0.5 percentage points to 12 percent for commercial banks from August 15, the country's central bank announced Monday.

The People's Bank of China (PBOC) said the latest action is the sixth time it has raised the ratio this year.

The ratio represents the money banks must set aside in reserves and increasing the ratio is designed to reduce the amount of money available for lending or investing in an already heated economy.

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

"However, 0.5 percentage points is not large enough - it can't even absorb the newly-added foreign exchange reserves," Song said.

"China's forex reserves go up by about US$30 billion a month while loans of commercial banks totaled 25 trillion yuan (US$3.3 trillion) at the end of June," he explained, "which means that a 0.5 percentage points rise can only absorb 125 billion yuan (US$16.52 billion) a month."

China's gross domestic product (GDP) rose 11.5 percent in the first half of the year, after it grew 11.9 percent in the second quarter, while the country's consumer price index (CPI) went up to a 28-month high of 4.4 percent in June and 3.2 percent in the first half.

In an effort to curb China's excess liquidity, China raised the one-year benchmark deposit and lending rates by 27 basis points to 3.33 percent and 6.84 percent respectively following an interest rate hike announced last Friday .

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

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

Some economists expect the ratio to go as high as 15 percent by year's end, although such steps can ultimately hurt the banks.

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 US$1.33 trillion at the end of June, up 41.6 percent on the same period last year.

A total of US$266.3 billion were added to the country's foreign exchange reserve in the first half of 2007, US$144 billion more than a year ago, said the central bank. The six-month rise is higher than the whole-year rise of US$247.3 billion in 2006.

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