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China Raising Reserve-requirement Ratio for Commercial Banks

China's central bank on Saturday ordered lenders to set aside more money as reserve, the fifth such move this year. It was the latest effort to enhance liquidity management in the banking sector.

The reserve-requirement ratio would be raised by 0.5 percentage points on June 15, and another 0.5 percentage points on June 25, the People's Bank of China (PBOC) said on its website.

This will bring the ratio to a record high of 17.5 percent.

The PBOC also said that corporate financial institutions in the worst quake-hit areas would postpone carrying out the regulation. But it didn't say how long the delayed period would be.

"The rise, a further materialization of the tight monetary policy, is aimed at strengthening liquidity management in the banking system," the statement said.

The PBOC had raised the ratio four times previously this year. The latest was on May 12 when it lifted the ratio to a new high of 16.5 percent.

Yin Jianfeng, director of the Institute of Finance and Banking with the Chinese Academy of Social Sciences, said the move would help the country reduce inflationary pressure and to control excessive investment.

"But the move will not be as effective as the government expected because inflation nationwide mainly resulted from surging production material and food prices," he said. "A simple monetary policy will not help."

The consumer price index (CPI), the main inflation gauge, was up 8.5 percent in April from a year earlier. This was nearly equal to February's 8.7-percent rise, the most since May 1996.

Zuo Xiaolei, Galaxy Securities chief economist, said huge foreign exchange reserves and economy unrest in neighbouring countries had posed great pressure to China's economy. This had forced the government to adjust its economic policy before it could reach a balance.

"A great deal of hot money swarmed into China's economy, and the PBOC aims to hedging excessive monetary liquidity," said Wu Xiaoqiu, head of the Financial and Securities Research Institute of the China Renmin University.

Wu said the government was likely to carry out more monetary policies to curb inflation and liquidity in the near future.

China adopted the tight monetary policy late last year to prevent the economy from overheating. It was also to guard against a shift from structural price rises to evident inflation. The country adhered to the policy despite a global slowdown hit by the international credit crunch.

The country's economic growth slowed in the first quarter but still reported double-digit growth. It expanded 10.6 percent, compared with 11.7 percent in the same period a year ago.

(Xinhua News Agency June 8, 2008)

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