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China moves to curb excessive credit, money growth |
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BEIJING, July 21 (Reuters) - China raised commercial banks' reserve requirements on Friday for the second time in five weeks in a bid to cool a racing economy that grew 11.3 percent in the second quarter from a year earlier. The tightening will suck out of the banking system some of the cash generated by China's record trade surpluses, which is feeding an investment boom that is adding to the imbalances plaguing the world's fourth-largest economy. "It's a very positive step. It directly tackles the problem of excess liquidity, which is the key risk to the economy at the moment. It should help to curb credit growth," said Ben Simpfendorder, an economist at Royal Bank of Scotland in Hong Kong. The People's Bank of China (PBOC) said it was increasing the proportion of deposits that big banks must hold in reserve, rather than lend out, by 0.5 percentage point to 8.5 percent, effective from Aug. 15. A similar move on June 16 required banks to tie up a further 150 billion yuan ($18.75 billion) at the PBOC. It said the latest tightening was aimed principally at strengthening liquidity management and curbing excessively rapid growth in money supply and credit. The overarching purpose, it added, was to maintain the sound momentum of the economy. Economists had widely expected further tightening after Tuesday's surprisingly strong gross domestic product figures Markets had been awash with speculation of a central bank announcement to coincide with the first anniversary of a landmark 2.1 percent revaluation of the yuan <CNY=CFXS> and accompanying shift from a dollar peg to a managed float. The yen had gained on rumours that China could announce measures to make its currency more flexible, only to briefly trim those losses on news of the stiffer reserve requirements.
MORE TO COME?
Zhang Haiyu, the research director of a think-tank under the National Development and Reform Commission, China's top planning agency, said that in China tougher reserve requirements were more effective than interest rates in soaking up excess liquidity. "If the economy keeps growing at a pace around 11 percent this quarter, the reserve ratio will be further increased. I think 9 to 10 percent is an appropriate level," Zhang said. Investment is surging at a 30 percent rate, money supply is expanding well above target and China last month recorded a record $14.5 billion trade surplus. "The momentum of the economy remains strong and more tightening steps are expected," said Wang Chuanglian, an economist with Great Wall Fund Management in Shenzhen. The central bank might need to increase reserve requirements by 2 to 3 percentage points, including Friday's rise, by early 2007 to staunch the flood of liquidity, Wang said. He said the central bank preferred to tighten via reserve requirements rather than interest rates because inflation remains benign -- consumer prices rose 1.5 percent in the year to June -- and an increase in rates could generate upward pressure on the yuan by sucking in more hot money. Sun Jianping, an analyst with Guotai & Junan Securities in Shanghai, agreed: "The move reduces the possibility of any interest rate increases in the third quarter of this year." (Additional reporting by Shanghai, Hong Kong and London)
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