Central bank raises deposit reserve ratio by 0.5%

Updated: 2007-02-16 17:28

China raised the amount of money banks must hold in reserve for the second time since the start of the year on Friday, reducing the amount available for lending in a renewed bid to cool sizzling economic growth.

The People's Bank of China, the nation's central bank, sai in its website Friday it will raise the reserve ration on bank desposits by 0.5 percent point on February 25. That would raise the amount of money that banks are required to keep on deposit with the government to 10 percent of their deposits.

The People's Bank of China is trying to contain a boom in lending and real estate development that the government worries could ignite inflation or a debt crisis. The other reserve ratio increase this year was on January 15.

Besides increasing the deposit reserve requirement ratio, the government has also raised interest rates to curb excessive liquidity and rapid fixed-asset investment growth.

"As a general principal we expect 50 bps (basis points) reserve requirement hikes once every quarter this year. It is an effective and cheap tool of reducing all the liquidity in the banking system," Stephen Green, a senior economist with Standard Chartered Bank, said in a statement.

Green said the central bank may have acted now to prepare for an expected spike in deposits following the Lunar New Year. Cash gifts are traditionally given in red envelopes to family and friends over the holiday.

"Move now and you can lock some of those funds up as soon as they hit the system in the week beginning February 26th," he said.

China's economy last year grew 10.7 percent - the highest rate since 1995 - and a central bank report at the beginning of the year estimated it would expand 9.8 this year.

The bank said it would continue to implement "a prudent monetary policy, strengthen the liquidity management" and "guide reasonable growth of monetary credit."

The central bank said was still worried about China's international balance of payments problem, which is boosting the excessive liquidity. The trade surplus jumped 67 percent in January compared to the same month last year.

It hit a record US$177.5 billion in 2006, up 74 percent from the previous year, straining ties with Washington and other trade partners who say Beijing has not done enough to let its currency appreciate.

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