BEIJING – The
announcement by China's central bank at the
weekend that it will raise the deposit reserve
requirement ratio for commercial banks by one
percentage point, the highest such increase in
four years, indicates a tightening of its monetary
policy as the government strives to cool the
economy.
The move, which follows a call
last week for tightening monetary policy by the
high-profile government's Central Economic Work
Conference, means commercial banks will have to
put aside an
additional 400 billion yuan
(US$54 billion) as reserves.
At the same
time, the National Development and Reform
Commission (NDRC), the country's top economic
planning body, said the government will increase
its overall spending budget and continue to adjust
investment structure. The NDRC's announcement is
also in line with the call of the Central Economic
Work Conference to continue the country's
"prudent" fiscal policy. The Central Economic
Work Conference on Wednesday concluded with a
pledge to shift its monetary policy - or control
of money supply in the economy - from "prudently
expansionary", an approach it has followed for the
past 10 years, to "tight".
The conference,
an annual event initiated more than a decade ago,
serves as a crucial mechanism for the Central
Committee of the Chinese Communist Party and the
State Council, the cabinet, to make policies
toward the country's economy.
Although
China will tighten its monetary policy, through
higher interest rates and other measures, it will
maintain a "prudent" fiscal policy for the coming
year, focusing on increasing government spending
to stimulate domestic consumption. Fiscal policy
refers to government borrowing, spending and
taxation.
In short, the policy principles
set by the three-day Central Economic Work
conference early last week are to curb the
excessive liquidity, or too much money in
circulation, which is blamed for heating up the
economy and raising inflation, while at the same
time continuing to increase government spending to
boost domestic demand.
Days after the
policy-setting meeting, government departments are
now moving to implement the policy principles it
set.
China will raise the reserve
requirement ratio by one percentage point for
commercial banks in an effort to cool the booming
economy, the People's Bank of China (PBoC), or
central bank, announced on Saturday. The move,
which will take effect on December 25, will push
the ratio to a new high of 14.5%, after it reached
a 10-year high of 13.5% on November 26.
The increase is aimed at "strengthening
liquidity management in the banking system and
checking excessive credit growth", PBoC said in a
statement posted on its website. It is the first
time China has raised the reserve requirement
ratio by as much as one percentage point since
September, 2003. The other nine rises this year
were half a percentage point each.
It
means that a tighter monetary policy has been
adopted, said Song Guoqing, a professor with
Peking University.
The timing of the move
is also to prevent a boom in credit, which usually
rebounds at the beginning of a year, he said.
Concerns about investment, the prime
driver of China's economic growth, has been
growing this year, as urban fixed-asset investment
picked up pace by rising 26.9% year-on-year in the
first 10 months.
The move is also a
reflection of the government's decision to prevent
inflation, which has so far largely been confined
to food, from spilling over into other sectors,
said Peng Xingyun, a researcher with the Institute
of Finance and Banking under the Chinese Academy
of Social Sciences.
Against a background
of rising trade surpluses and foreign exchange
reserves, the rise is a further move to hedge
excessive liquidity in the country, said Peng. It
is estimated that a one percentage point increase
in the reserve requirement ratio could reduce
liquidity in the market by 400 billion yuan.
At a conference held by the PBoC on
Wednesday, the central bank plans to use various
monetary policy instruments to curb excessive
liquidity and to improve the yuan exchange rate
forming mechanism to adjust the total demand and
supply and to improve trade imbalances.
The central bank has raised interest rate
five times this year.
"China's future
monetary policies will depend on the country's
economic situation," said Peng. "It does not
necessarily mean more rises in interest rates or
in the reserve requirement ratio."
On the
other hand, the NDRC vowed that the government
will increase its overall investment budget and
continue to adjust investment structure.
Ma Kai, head of the NDRC, said at a
national development and reform meeting in Beijing
on Friday that after a "continuous and rapid"
increase in fiscal revenue in recent years, China
will mainly use its fiscal expenditure to improve
people's livelihood and boost economic and social
development in weak and backward areas.
He
didn't disclose the specific figures for 2008,
noting that a relevant ministry is working at the
budget. The fiscal budget for 2007 reached 2.687
trillion yuan, up 14.4% year on year.
Ma
said the larger investment will be mainly used in
construction of rural regions and the western
areas, energy-saving and emission reduction
projects, innovation, social welfare and on major
infrastructure projects. The government plans to
issue smaller amounts of long-term construction
debts next year, he said.
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