The reserve requirement ratio - or the amount of money commercial banks must set aside as reserve - will be raised by 1 percentage point to 14.5 percent from December 25, the central bank said on the weekend.

 

The ratio will be the highest since China unified reserve requirements more than two decades ago; and analysts said it may rise further as authorities try every possible means to mop up liquidity.

 

The hike is in line with "the requirement by the Central Economic Work Conference to tighten monetary policy, strengthen the banking system's liquidity management and rein in unduly fast credit growth," the People's Bank of China said in a brief statement on its website.

 

At a high-level central economic conference last week, top policymakers decided to adopt a "tight" monetary policy to prevent the economy from overheating and price rises from evolving into entrenched inflation.

 

Broad money supply, including cash and all deposits, reached 39.42 trillion yuan ($5.3 trillion) by the end of October, up 18.47 percent year on year, 1.53 percentage points higher than the end of last year.

 

The increasing liquidity has led to fast investment growth and exacerbated price rises. In October, the consumer price index reached 6.5 percent, matching a decade high in August. It is widely expected to further rise in November.

 

The reserve ratio revision will be the 10th this year - along with five interest rate hikes - and is expected to absorb more than 300 billion yuan.

 

The central bank has raised the ratio by 0.5 percentage point each time since April 2004. The more-than-usual increase this time indicates the authorities' determination.

 

"It sends a signal that policies would be more stringent than before," said Guo Tianyong, economist with the Central University of Finance and Economics.

 

The hike will reduce the money available for commercial banks to lend, and also help reduce pressure on price rises, he said.

 

The move may also be a pre-emptive step by the central bank to prevent commercial banks from rushing to lend from the start of next year, said Ding Jianchen, professor of finance with the University of International Business and Economics.

 

Commercial banks tend to lend as much as they can as the new year starts so that their balance sheet would not be affected even if the authorities tightened lending norms in the second half of the year.

 

Despite the latest move, analysts said excess liquidity remains a serious problem and will not ease in the short term.

 

(China Daily December 10, 2007)