Vol. 5 Num 926 Sat. January 06, 2007  

China hikes bank reserve ratio to cool economy

China's central bank on Friday ordered major commercial banks to set aside more money in reserves in a renewed effort to slow its red hot economy, the first such cooling measure of 2007.

The People's Bank of China said in a statement that the required deposit reserve ratio for commercial lenders would on January 15 rise 0.5 percentage point to 9.5 percent.

It said that the action came as a result of sharp increases in China's trade surplus, while a rising tide of liquidity in the banking system was ramping up dangerously easy credit.

"Given the dynamic changes in current liquidity, the central bank decided to raise the reserve requirement again to consolidate the effects of macroeconomic controls."

"Since 2006, the People's Bank of China has used a combination of monetary tools to soak up liquidity in the banking system," the central bank said in a statement posted on its website.

"In the last few months the pace of increase in loans has slowed, but the basis of the effectiveness of the macroeconomic control measures is definitely not firm enough."

"So due to the difference in the international balance of payments, the already excessive liquidity in the banking system has again increased, making for relatively greater pressure on loan expansion," it concluded.

China's mounting trade surplus along with a strong inflow of foreign direct investment both add unwanted liquidity to the banking system at a time when regulators are trying to slow the pace of lending and brake the economy.

"Due to the excessive liquidity and huge trade surplus, the central bank has to raise the reserve ratio every three to four months," said Gao Shanwen, an economist with Everbright Securities based in Shanghai.

"It has become routine practice."

The required deposit ratio was raised a similar 0.5 percentage point three times last year -- just some in a slew of industry-specific macroeconomic tuning measures that included two interest rates hikes.

China's economy, the world's fourth-largest, expanded 10.7 percent in the first three quarters from the same period last year, and economists widely predict that full-year growth will fall around the 10.5 percent mark.

But slowing this kind of pace is hard to achieve when mainland banks are swimming in cash due to foreign direct investment flows, while China's factories export everything from plastics to electronics.

Economists expect China's full year surplus to reach at least 180 billion dollars, compared to 101.9 billion dollars last year. The gap is a source of major trade friction with the United States.

In December Wu Xiaoling, vice governor of the central bank warned that new lending by China's banks in 2006 was expected to hit around three trillion yuan (384 billion dollars), sharply exceeding the national target of 2.5 trillion.

Money supply, another key indicator of financial health, has also steadily remained at rates higher than the annual national target set by the central bank.