China raises bank reserve requirements to slow credit growth

Sep 6, 2007 - China's central bank said it will raise the reserve requirement on bank deposits by 0.5 percentage points in a move to control rapidly expanding bank credit and money supply.

The People's Bank of China said in a brief statement on its website that the increase takes effect on September 25.

It is the seventh increase this year, bringing the reserve ratio to 12.5 pct for most banks.

China has been struggling to control a rapid expansion in bank lending, which it fears is fuelling investment and adding to inflationary pressure.

The central bank has already raised interest rates four times this year in an effort to check an expansion in bank credits. But outstanding loans were up 16.6 pct year-on-year as of the end of July, while the broad M2 money supply was up 18.5 pct.

In July, China's consumer price index rose 5.6 pct year-on-year, its highest monthly rate in over a decade, with senior government officials predicting August figures to be even higher.

The central bank has also been forced to soak up or sterilize funds entering the banking system as the nation builds up a growing trade surplus. China had a trade surplus of 136.82 bln usd in the first seven months of the year.

Analysts noted that the People's Bank of China needs to respond to maturing short term paper that it had previously issued to soak up liquidity in the banking system.

"The People's Bank of China is forced to hike reserve ratios because of 837 bln yuan in (central bank) paper maturing in the next two months," said Logan Wright, analyst at Stone & McCarthy Associates, a research firm affiliated with XFN-Asia.

Wright estimates the central bank's latest move will freeze 185 to 190 bln yuan within the banking system.

(1 usd = 7.6 yuan)