Banking News
- PBOC governor hints at reserve increases
Date: 7-May-2007 Sources: (Xinhua Online)
People's Bank of China Governor Zhou Xiaochuan said there's room to raise commercial banks' reserve requirements further after seven increases in 11 months failed to slow lending and inflation.
'There surely is still room' to raise the reserve requirements, Zhou said in an interview on a flight from Beijing to Frankfurt on Saturday.
Zhou, on his way to a meeting at the Bank for International Settlements in Basel, Switzerland, also said an acceleration in inflation to the fastest pace in two years is 'normal' and 'not very unexpected,' Bloomberg News reported. China's central government is trying to prevent excess cash from a record trade surplus from stoking inflation, fueling wasteful investment and creating more bad loans.
Economic growth accelerated to 11.1 percent in the first quarter from 10.4 percent in the previous three months, driven by a trade surplus that almost doubled to 46.4 billion U.S. dollars.
The PBOC has raised interest rates three times since April last year and sold bills to soak up liquidity in the banking system and stem price increases. Still, inflation accelerated to 3.3 percent in March, the highest rate in more than two years, and banks made 1.4 trillion yuan (180 billion dollars) of new loans in the first quarter alone, nearly half the total for last year.
'The recent acceleration in inflation is normal' because prices of primary goods have increased substantially and labor costs have risen, Zhou said.
Asked whether inflation can be kept below the bank's three percent target on average in 2007, Zhou said that depends on developments in the second half of the year.
The PBOC on April 29 raised the reserve ratio, which determines the amount of money banks must hold with the central bank rather than lend, to 11 percent from 10.5 percent. The move takes effect on May 15.
Reserve ratio adjustments are an ineffective policy tool to control China's monetary expansion since commercial banks have excess reserves that stand at about two percent of deposits, said Hong Liang, an economist with Goldman Sachs.
The 50 basis-point lift in the reserve ratio each time 'is simply not binding on banks' capabilities to lend,' she said in a note on April 29. An interest rate increase is the key, she added.
China will raise interest rates two more times this year, according to a Bloomberg News survey of economists.
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