Small and medium-sized banks are facing tighter liquidity due to a higher reserve requirement ratio, a central bank official said yesterday.

Hu Pingxi, head of the People's Bank of China Shanghai branch, said yesterday the higher ratio has made it more difficult for smaller banks to operate on the interbank market.

The ratio refers to the proportion of money banks must hold in reserve. The central bank has lifted the ratio 11 times since the beginning of last year, pushing it to a record high of 15 percent.

The central bank also raised interest rates six times last year as it tried to cool the economy and curb inflation.

"The accumulated effects of these measures are obvious," Hu said. "Under tightened monetary policy, banks - especially the small and medium-sized lenders - have less liquidity and more difficulty on the interbank market."

The government has vowed to stick with tightening measures to prevent the economy from overheating and to stop structural price rises from evolving into entrenched inflation. But Hu said the central bank takes a flexible approach according to the conditions.

Hu said the central bank is currently considering allowing locally incorporated foreign banks to issue credit and debit cards.

"We must look at it (card issuing) step by step," Hu said, adding that infrastructure is still inadequate - in particular, the shortage of overseas bank outlets and ATMs.

"It's a matter of redistribution of benefits. It's improper to let foreign banks use Chinese commercial banks' ATMs," he said.

(China Daily March 11, 2008)