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Central bank raises deposit reserve ratio

(Xinhua)
Updated: 2007-02-17 09:09

Related readings:  PBOC lifts reserve ratio on deposits  Deposit reserve ratio raised by 0.5%  Money supply grows, deposit shrinks in January  Money supply in line with trend

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

This moderate increase shows that the People'sBank of China(PBOC) had shied away from using drastic moves to absorb liquidity as the country'sconsumer 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, was made to deal with "dynamic currency liquidity changes and to consolidate macro-economic controls", said the central bank in its latest statement.

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

China's central bank lifted deposit reserve ratio by the same margin of 0.5 percentage points on January 15, which was estimated to take 150 billion yuan (18.8 billion US dollars) 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-addedrenminbi-denominated loans amounted to 567.6 billion yuan in January, basically equivalent to last January but twice as much as last year's monthly average.

The outstanding renminbi-dominated loans amounted to 23.1 trillion yuan in January, up 16 percentyear-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 capital market and allow stock markets to play a bigger role.

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