The central bank's decision to raise the reserve requirement for domestic banks and finance institutions starting next month is expected to have only a minimal impact on China's stock markets in the long term, analysts say.

Share prices in Shanghai rebounded slightly, rising 0.21 percent to end at 1425.21 yesterday after falling 1.16 percent on Monday when the stock market reacted negatively to the decision by the People's Bank of China to increase the reserve requirement to 7 percent from 6 percent starting on September 21.

The move seeks to curtail the oversupply of money and banking loans to cool some overheated sectors, such as the real estate industry.

It is generally believed that higher reserve requirements would slow down money supply, which would dampen trading on the stock market as less capital flows in.

However, an analyst believes that it is unlikely to happen in China because Chinese banking loans are not allowed to be invested in stocks.

"The increase or decrease in the reserve requirement does not exert too much impact on the movements in the stock market as the loans are banned from investing in equities," said Qiu Yanying, an analyst at China Securities Co Ltd.

There were previous cases in which banking loans were invested in the stock market but the crackdown by the central bank on such practices in 2001 has ensured the malpractice is kept at bay.

"It is a clean market that is now almost free of illegal money. So I think that would not cause a wild swing," said Zhang Qi, an analyst at Haitong Securities Co Ltd.

But the banking and real estate sectors would be hard hit by the more stringent monetary policy.

"Banks would earn less as they have less money for lending while property companies would not have as easy an access to banking loans as before," said Yu Hao, analyst at China Euro Securities Co Ltd.

The 1 percentage point change in the reserve requirements is expected to freeze 150 billion yuan (US$18.12 billion) in bank reserves, according to the central bank.

As a result, the growth in M2 money supply, which tracks cash in circulation, demand and time deposits, would be reduced by 3.65 percent this year from around 16 percent in 2002, according to a report from Shenyin & Wanguo Research & Consulting Co Ltd.

Banks would provide some 453 billion yuan less in loans this year than Last year's 1.9 trillion yuan, according to the report.

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