China announced a moderate increase in banks' reserve
requirements on Friday in a further step to cool down excessive
investment and credit growth.
Following a 27-basis-point interest rate hike less than two
months ago, the People's Bank of China (PBOC), the central bank,
raised the required reserve ratios of banks, excluding rural banks
and cooperatives, by half a percentage point, effective July 5.
That will bring the required reserve ratio for major banks,
including the four state-controlled lenders such as Hong
Kong-listed China Construction Bank and Bank of China, to 8
percent. The ratio is the proportion of deposits a bank is required
to have with the central bank as a way of managing their lending
capacity.
The move followed economists' calls for further tightening after
data showed that fixed-asset investment soared a worrisome 30.3
percent in the first five months of the year, compared to a 29.6
percent increase in the first four months.
The investment surge was fuelled by rapid growth in money
supply, which rose by a faster-than-expected 19 percent in the
first five months of the year.
"The main purpose of this increase in reserve requirements is to
prevent the excessive growth in credits, and therefore provide a
stable monetary and financial environment for the sustained and
healthy development of the national economy," the PBOC said in a
statement.
Although consumer prices remained in check, continued rapid
growth of money supply will stoke an overheating of the economy and
increase the risk of inflation, the bank said.
The increase in reserve requirements is estimated to freeze 150
billion yuan (US$18 billion) of funds in the banking system, but
will not disrupt normal clearing and lending operations given the
current ample liquidity, it said.
(China Daily June 17, 2006)