The required reserve ratio for financial institutions engaging in deposit business will be raised 0.5 percentage points on February 25, bringing it to 10 percent, the second hike in two straight months, sources with China's central bank said yesterday.

This moderate increase shows that the People's Bank of China (PBC) had shied away from using drastic moves to absorb liquidity as the country's consumer price index, the measure for inflation, grew by only 2.2 percent in January, down 0.6 percentage points from the previous month, observers said.

The reserve ratio hike, the fifth of its kind since last July, is aimed at dealing with "dynamic currency liquidity changes and to consolidate macro-economic controls," said the central bank in its latest statement. 

The statement also said that unbalanced international payment generated by a mounting trade surplus had resulted in increasing currency liquidity and made another reserve ratio hike necessary.

The central bank lifted the deposit reserve ratio by the same margin of 0.5 percentage points on January 15, which was estimated to take 150 billion yuan (US$19.3 billion) out of the banking pool.

However, some economists argued that an interest rate hike was inevitable, as reserve ratio adjustments and open market operations had proved ineffective in curbing excess liquidity.

Official data revealed that the newly added renminbi-denominated loans amounted to 567.6 billion yuan (US$73.2 billion) in January, approximately equivalent to last January but still twice as much as last year's monthly average.

The outstanding renminbi-dominated loans amounted to 23.1 trillion yuan (US$2.98 trillion) in January, up 16 percent year-on-year. The growth rate was 0.9 percentage points higher than the end of last year and up 2.2 percentage points from last January.

Yin Zhongli, an expert with the Financial Research Institute of the Chinese Academy of Social Sciences, called the move "an expected expedient."

"This won't be the last reserve ratio hike of the year. Meanwhile, interest rate rises are far from the best tool to absorb liquidity," he said.

Economist Han Zhiguo contended that an advisable way was to facilitate the development of the capital market and allow stock markets to play a bigger role.

The central bank reiterated in its statement that it would "adopt a prudent monetary policy, tighten the management of bank liquidity and facilitate the rational growth in monetary credit."

(Xinhua News Agency February 17, 2007)