China hikes reserve ratio to slow economy
Monday, April 30, 2007
CHINA'S central bank yesterday ordered major commercial banks to set aside more money in reserves in an effort to slow its economy after higher-than-expected first-quarter growth figures.
The required reserve ratio will rise by 50 basis points to 11 per cent with effect from May 15, the People's Bank of China announced in a brief statement on its website, but government-employed economists said more might be needed.
"Raising the reserve ratio is a rather easy and flexible measure for the central bank," said Wang Xiaoguang, an economist at the National Development and Reform Commission, according to Xinhua news agency.
"But it might need to raise interest rates if the nation's strong economic momentum and inflationary pressures continue in the second quarter."
Speculation had been rife that the government would announce more tightening measures after it unveiled 11.1 per cent economic growth in the first three months of the year.
The world's fourth-largest economy is fuelled by a potent mix of exports and investments, and monetary measures such as this are meant to reduce liquidity, which drives the massive spending on new investment projects.
It is the fourth time the central bank has hiked the required reserve ratio since the start of this year, and the seventh time since June 2006.
It is estimated that each time China hikes the reserve ratio by 50 basis points, it freezes at least 150 billion yuan (US$19 billion) in the banking system.
Interest rates are a much more forceful monetary weapon, and the government tends to use it much less frequently.
Last month, however, authorities raised the benchmark one-year lending rate by 0.27 percentage points.
The central bank is fighting a rising tide of liquidity stemming from export earnings, as well as outstanding sterilisation paper that is reaching maturity.
Sterilisation is a technical term for central bank operations aimed at curbing liquidity rising as a result of an influx of foreign funds in a tightly controlled exchange rate regime such as China's.
The announcement of the hike in the reserve ratio also followed March inflation figures showing a 3.3 per cent spike in consumer prices from a year earlier.
The rise, the highest in more than two years, was "well beyond" the comfortable target of three per cent set by the Chinese government for the year, Xinhua said.
Li Xiaochao, spokesman of the National Bureau of Statistics, warned earlier this month that if this trend continued, there was a risk of shifting "from fast growth to overheating".
"What the central bank will do is largely determined by the inflation level," said Sun Mingchun, a Hong Kong-based economist with Lehman Brothers.
"We expect the inflation for the full year to be 2.8 per cent, still below the three percent target set by the central bank." AFP
The required reserve ratio will rise by 50 basis points to 11 per cent with effect from May 15, the People's Bank of China announced in a brief statement on its website, but government-employed economists said more might be needed.
"Raising the reserve ratio is a rather easy and flexible measure for the central bank," said Wang Xiaoguang, an economist at the National Development and Reform Commission, according to Xinhua news agency.
"But it might need to raise interest rates if the nation's strong economic momentum and inflationary pressures continue in the second quarter."
Speculation had been rife that the government would announce more tightening measures after it unveiled 11.1 per cent economic growth in the first three months of the year.
The world's fourth-largest economy is fuelled by a potent mix of exports and investments, and monetary measures such as this are meant to reduce liquidity, which drives the massive spending on new investment projects.
It is the fourth time the central bank has hiked the required reserve ratio since the start of this year, and the seventh time since June 2006.
It is estimated that each time China hikes the reserve ratio by 50 basis points, it freezes at least 150 billion yuan (US$19 billion) in the banking system.
Interest rates are a much more forceful monetary weapon, and the government tends to use it much less frequently.
Last month, however, authorities raised the benchmark one-year lending rate by 0.27 percentage points.
The central bank is fighting a rising tide of liquidity stemming from export earnings, as well as outstanding sterilisation paper that is reaching maturity.
Sterilisation is a technical term for central bank operations aimed at curbing liquidity rising as a result of an influx of foreign funds in a tightly controlled exchange rate regime such as China's.
The announcement of the hike in the reserve ratio also followed March inflation figures showing a 3.3 per cent spike in consumer prices from a year earlier.
The rise, the highest in more than two years, was "well beyond" the comfortable target of three per cent set by the Chinese government for the year, Xinhua said.
Li Xiaochao, spokesman of the National Bureau of Statistics, warned earlier this month that if this trend continued, there was a risk of shifting "from fast growth to overheating".
"What the central bank will do is largely determined by the inflation level," said Sun Mingchun, a Hong Kong-based economist with Lehman Brothers.
"We expect the inflation for the full year to be 2.8 per cent, still below the three percent target set by the central bank." AFP
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