BEIJING - China
will raise the reserve requirement ratio by half a
percentage point for commercial banks to 12.5% in
an effort to cool the booming economy, the
People's Bank of China (PBoC) said on Thursday.
Experts said the frequent use of such
monetary policy instruments shows the government's
determination to curb the excess liquidity and
rising inflation.
This is the seventh time
this year the central bank has raised the deposit
reserve ratio, which is aimed at "strengthening liquidity
management in the banking
system and checking the excessive credit growth",
the PBoC said in a statement.
The move,
which will take effect on September 25, comes
after China reduced the tax on interest income to
5% from 20% from August 15 and raised the
benchmark interest rate four times this year.
"Raising the reserve requirement ratio has
become a routine measure for the central bank to
ease liquidity," said Yang Chengzhang, chief
economist at Shenyin & Wanguo Securities Co
Ltd. "The latest hike will also help China
stabilize soaring prices."
Experts said
the frequent use of such monetary policy
instruments shows the government's determination
to curb the excess liquidity and rising inflation.
Therefore, China's monetary policy in the near
future will mainly focus on taming the country's
rising inflation pressure, experts here say,
suggesting more interest-rate hikes are likely.
Various economists have warned about the
coming of an inflation era in China. Andy Xie,
former analyst with Morgan Stanley, even warned
that if inflation persists, China will see an
economic slump like that in 1997-98.
Though official data on August's Consumer
Price Index (CPI), China's key inflation
indicator, remain to be publicized, market
consensus is that its growth rate has a large
chance to hit a new high. The CPI annual growth
rate went up to a 33-month high of 5.6% in July,
with analysts predicting the rate will be even
higher in August.
Li Huiyong, senior
analyst at Shenyin & Wanguo Securities,
predicted the rate would be 5.8% in August and
peak in October, while the DBS Bank said in a
latest report that August's CPI annual growth rate
would exceed 6%. And this round of inflation will
last for quite a long period of time, 2008-09
included, Li said.
Government authorities
also aired their worries about the country's price
level. On Tuesday, Bi Jingquan, vice director of
the National Development and Reform Commission,
said the country's price rises are structural, and
that the country can manage stable overall prices
after some structural factors disappear.
Since the central bank raised interest
rates consecutively in July and August, it is hard
to predict whether interest will be lifted again
this month, but analysts are sure that the central
bank will hike the rate some time in the remainder
of 2007.
But Zhao Qingming, head of China
Construction Bank's research department, said
there is not much room for the PBoC to hike
interest rates, hence it is more feasible for it
to raise the deposit reserve ratio.
"There's little space for China to further
raise its high interest rates as the world's major
economies are considering interest-rate
reduction," Zhao said.
As for the reserve
requirement ratio, he said, there is still space
for further hikes because the 12.5% ratio is 0.5
percentage point short of the historical record a
decade ago.
To rein in inflationary
tendencies, the central bank could also frequently
use directional tools such as central bank bills
and special Treasury bonds unless previous use of
special state bonds and central bank bills have
fulfilled planned liquidity-upsetting targets.
For the first time China used special
Treasury bonds to offset liquidity on Tuesday by
repurchasing 10 billion yuan (US$1.3 billion) of
capital from commercial banks.
Meanwhile,
China's money supply is staying at a high level,
with M2, which covers cash in circulation plus all
deposits, rising 18.5% in July over the same
period last year.
China's foreign-exchange
reserves reached $1.33 trillion at the end of
June, up 41.6% over the same period last year.
A total of $266.3 billion was added in the
first half of 2007, compared with a rise of $247.3
billion for the whole of 2006.
The
country's commercial banks lent 2.77 trillion yuan
($369.33 billion) from January to July, equivalent
to 90% of last year's total.
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