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)
