The sixth hike of banks' reserve rate this year should not come
as a surprise for robust growth figures for the first half year
have been calling for more tightening efforts.
However, the pace at which the monetary authorities have acted
to mop up excess liquidity is noteworthy. It shows that
policymakers are keen to curb lending growth that can stoke an
unwelcome investment rebound.
The People's Bank of China raised the reserve requirement ratio
by 0.5 percentage points to 12 percent for the country's big
lenders on Monday.
The move, like previous ones, is expected to help the central
bank to absorb liquidity in the market by about 150 billion yuan
($20 billion). This amount of reduction in liquidity is not very
huge in comparison with the country's lending growth. China's
commercial banks lent up to 2.5 trillion yuan ($329 billion) in the
first half of the year, approaching 80 percent of last year's
total.
But the accumulative effect of six such hikes in banks' reserve
requirement ratio is fairly considerable now. More importantly, the
latest step comes just 10 days after the central bank raised
benchmark interest rates by 0.27 percentage points and the State
Council cut the tax on interest income from 20 percent to 5
percent.
Such intensified efforts are all aimed at reducing liquidity and
stabilizing the blistering economy. The Chinese economy is
expanding at the fastest rate in more than a decade. It has grown
by 11.5 percent in the first half of the year.
To prevent the economy from overheating, policymakers must take
measures to make sure that liquidity and bank lending do not get
out of control in the short term.
A key source of excess liquidity is the country's soaring trade
surplus. Though the government has adopted a slew of tax and
environmental policies to rein in export growth and reduce external
imbalance, China will likely continue to reap more trade surplus as
a low-cost global manufacturing base.
By ordering lenders to set aside more money as reserves, the
central bank has struck at the root of the ongoing rebound of
investment. For the sake of profitability, commercial banks are
eager to grant more loans when liquidity remains abundant.
(China Daily August 1, 2007)
