PBOC increases reserve ratio

By Zheng Lifei (China Daily)
Updated: 2006-11-04 08:45

China raised the bank deposit reserve ratio on Friday for the third time this year in a bid to rein in excessive liquidity in the banking system.

A clerk at a foreign currency exchange desk shows Chinese yuan banknotes in this July 22, 2005 file photo taken at a hotel in Shanghai, China. [AP]

The half-point percentage hike, which will take effect from November 15, will see the deposit reserve ratio the proportion of deposits that banks must hold in the central bank raised to 9 per cent for big State banks and joint-stock banks and to 9.5 per cent for smaller banks, including urban credit co-operatives.

"The problem of excessive liquidity has been alleviated somewhat thanks to the central bank's efforts to soak them up by deploying a mixture of monetary instruments," the central bank said in a statement on its website.

"However, the striking surplus in its international payments still remains outstanding and fresh excessive liquidity is still cropping up," the central bank said.

The latest reserve ratio hike comes amid signs that the central bank's previous monetary tightening policies are working.

The central bank announced similar increases on June 16 and July 21.

The central bank has also increased interest rates twice since late April in a bid to cool the red-hot economy that expanded 10.9 per cent in the first half of this year, raising concerns then that the economy may have overheated.

The closely watched indicator of broad money supply, or M2, which covers cash in circulation and deposits, grew 16.83 per cent in September from a year earlier, down from 17.9 per cent growth the previous month.

It was up 18.4 per cent in July from a year earlier.

The economy, which surged to a stunning 11.3 per cent in the second quarter, slowed to 10.4 per cent in the third quarter.

The central bank said the move, which is expected to freeze about 150 billion yuan (US$19 billion) in liquidity, aims to consolidate its "liquidity-soaking" achievements.

"The move shows that the central bank has become more proactive in its monetary policy," said Han Meng, an economist at the Chinese Academy of Social Sciences.

"But if the foreign trade surplus still maintains the current momentum and the inflow of foreign investment still climbs briskly, the central bank will still face a tough task in reining in the liquidity," the economist said.

China's foreign trade surplus hit US$109.9 billion in the first nine months of this year, while foreign direct investment stood at US$42.59 billion in the same period.

"The central bank will continue to stick to its sound monetary policy, keeping the policy stable and consistent," the central bank stressed in the statement.

"It will maintain a steady increase of credit and encourage the expansion of direct financing to spur the national economy in a sustainable, co-ordinated and healthy development," the central bank said.

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