China to raise reserve requirement ratio

http://www.chinaccm.com 2007-7-31 8:12

China will raise the reserve requirement ratio by 0.5 percentage 
points for commercial banks from Aug. 15, the People's Bank of China 
(PBOC) announced Monday.

"The move does not come as a surprise seeing as almost every economic 
index is overheating," said Song Guoqing. a well-known economist with
 Beijing University.

"However, 0.5 percentage points is not large enough - it can't even 
absorb the newly-added foreign exchange reserves," Song added.

"China's forex reserves go up by about 30 billion U.S. dollars a month
 while loans of commercial banks totaled 25 trillion yuan at the end 
of June," Song explained, "which means that a 0.5 percentage points 
rise can only absorb 125 billion yuan a month."

China's gross domestic product (GDP) rose 11.5 percent in the first 
half of the year, after it grew 11.9 percent in the second quarter,
 while the country's consumer price index (CPI) went up to a 28-month
 high of 4.4 percent in June and 3.2 percent in the first half.

This is the sixth time China has raised the reserve requirement ratio 
to curb China's excess liquidity, following an interest rate hike 
announced last Friday in which China raised the one-year benchmark 
deposit and lending rates by 27 basis points to 3.33 percent and 6.84
 percent respectively.

Meanwhile, the State Council, or cabinet, announced last Friday the 
reduction of tax on the interest on personal bank savings from 20 to
 five percent from Aug. 15.

"The measures just can't catch up with the overshooting economy," 
Song said, "so there will be more policies coming out."

The central bank said the move was aimed at "strengthening management 
of liquidity in the banking system and rationalizing lending growth".

PBOC statistics show that China's foreign exchange reserve reached 
1.33 trillion U.S. dollars at the end of June, up 41.6 percent on the
 same period last year.

A total of 266.3 billion U.S. dollars were added to the country's 
foreign exchange reserve in the first half of 2007, 144 billion U.S. 
dollars more than a year ago, said the central bank.

The six-month rise is higher than the whole-year rise of 247.3 
billion U.S. dollars in 2006. 

Source: Xinhua