The People's Bank of China posted a plan at Sunday night to raise commercial banks' reserve requirement at the central bank to 7.5 percent from seven percent beginning April 25, in a move to clamp down on fast growth of money supply and credit which is posing challenges for a healthy economic growth.

The decision had been approved by the State Council, China's cabinet, and would apply to the country's "Big Four" state-owned banks, 11 joint-stock banks and more than 100 urban and rural commercial banks among other financial institutions. However, thousands of rural and urban credit cooperatives would be able to continue with the existing six percent standard, the central bank said in a statement.

A 7.5-percent reserve requirement means that commercial banks should keep 7.5 percent of their deposits in the central bank in preparation for management of future operation risks. Only the remaining deposits can be used by commercial banks to lend.

The higher reserve ratio will "freeze" approximately 110 billion yuan (US$13.3 billion) in commercial banks' liquidity, according to the statement.

The central bank said China's economy, the world's sixth largest, was now facing such thorny problems as further swelling investment demand, money and credit growth and mounting pressure from inflation.

"The 0.5-percentage-point reserve hike is largely to prevent runaway growth of money and credit and keep the national economy expanding on a steady, fast and healthy track," it said.

Fast credit growth could be in tandem with inflation or "asset price bubbles", emergence of new non-performing loans at commercial banks and accumulation of financial risks, the People's Bank of China pointed out.

The statement said financial institutions' reserves at the central bank now exceed 2 trillion yuan (US$241 billion).

The People's Bank of China vowed to maintain the current "stable" monetary policies while making "precautionary and minor" adjustments to help the economy grow. China has set a seven percent economic growth target for 2004, compared with 9.1 percent last year.

(Xinhua News Agency April 12, 2004)