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Reserve Ratio Hiked to Absorb Liquidity
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The central bank raised required reserve ratio for financial institutions engaged in deposit business by 0.5 percentage points to 10 percent yesterday, with analysts projecting more such hikes.

HSBC (China)'s chief economist Qu Hongbin said the country's central bank is increasing the deposit reserve ratio to absorb liquidity. "This year we can expect three more reserve ratio hikes," he said.

In fact, the Bank of America projects the ratio to rise to 11.5 percent this year.

The People's Bank of China (PBC), or the central bank, has increased the deposit reserve ratio five times since last July, with the latest move expected to take 176.5 billion yuan (US$23.22 billion) out of the banking pool. In a public statement, the PBOC attributed the hikes to rising currency liquidity caused by "unbalanced international payments generated by mounting trade surplus".

Official data show the country's outstanding yuan-dominated loans amounted to 23.1 trillion yuan (US$2.96 trillion) in January, up 16 percent year on year. The growth rate was 0.9 percentage points higher than the end of last year and up 2.2 percentage points from that in last January.

China's trade surplus has continued to surge, with the January figure rising 67.3 percent year on year to US$15.88 billion.

Deputy chief representative of the Asian Development Bank in China Tang Min said the PBC wants to use the moderate reserve ratio hikes as a warning against excessively rapid increases in loans and rebounding investment.

China Galaxy Securities chief economist Zuo Xiaolei said: "The hike was expected and won't have much repercussion on the market."

Standard Chartered Bank economist Stephen Green felt the reserve ratio hike has reduced the chances of immediate increase in interest rates after the lunar new year. He expects the PBC to raise its interest rate at lease once this year.

Ma Jun, a Deutsche Bank economist, stands by the bank's previous projection that the interest rate will be raised twice, that is, a total increase of 54 basis points this year.

The Deutsche Bank considers interest rate hikes a proper tool to deal with the country's rising inflation and upsurge in investment, he said.

Analysts, too, think financial institutes, rather than individuals, would be directly affected because rising reserve ratio forces banks to set aside more of their deposits with the PBC and rein in their loans.

(China Daily February 26, 2007)

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