Banking News
- Central bank imposes inflation-fighting hike
Date: 10-Apr-2007 Sources: (Shenzhen Daily)
China has ordered its banks to set aside more money in reserves for the sixth time in 10 months to slow inflation and investment.
The reserve ratio -- the amount of money a bank must keep at the central bank -- will increase 0.5 percentage point to 10.5 percent on yuan deposits starting on April 16, the People's Bank of China said on its Website on Thursday. That's the same amount as the last five increases.
The central bank is concerned that cash from a record trade surplus is stoking excess investment in an economy that expanded 10.7 percent last year, the fastest in more than a decade.
The central bank uses reserve requirements, interest rates and treasury bill sales to soak up cash from a trade surplus that reached 177.5 billion U.S. dollars last year. The trade surplus surged ninefold in February from a year earlier to 23.8 billion dollars, the second-highest on record.
The central bank raised interest rates last month to an eight-year high to reduce the risk of loans fueling inflation and asset bubbles.
'The PBOC will maintain its stable money policy to strengthen its liquidity management,' the central bank said.
'We will prevent rapid credit growth and guide financial institutions to improve their credit structure and help boost healthy economic development.'
Economists forecast additional moves by the central bank this year.
'We have been expecting the PBOC to raise the reserve requirement rate once a quarter this year -- removing 160 billion yuan (20.7 billion dollars) from the bank each time,' said Stephen Green, a Standard Chartered Bank senior economist.
'This is the third move this year already, so we are now raising our view to six moves in total this year, bringing us to a reserve requirement ratio of 12 percent by year end,' he said.
The central bank raised the benchmark interest rate for one-year loans by 0.27 percentage point to 6.39 percent on March 18. The one-year deposit rate rose the same amount to 2.79 percent.
There have been five interest rate hikes since October 29, 2004. Even so, new loans extended by commercial banks reached 413.8 billion yuan in February, up 264.7 billion yuan from the same period last year.
Tao Dong, a Credit Suiss economist, said administrative measures specifically targeting aggressive lenders are possible.
The central bank, which aims to maintain the country's inflation rate below 3 percent and broad money supply, or M2, under 16 percent this year, may also be forced to sell more treasury bills to soak up excess liquidity.
PBOC Deputy Governor Wu Xiaoling acknowledged on Sunday that the bank may have to take further steps as the trade surplus expands and price pressures increase.
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