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Reserve Requirement Ratio Raised
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China will raise the reserve requirement ratio by 0.5 percentage points for commercial banks to 12.5 percent in an effort to cool the booming economy, the People's Bank of China (PBOC) said on Thursday.

This is the seventh such move this year, aimed at "strengthening liquidity management in the banking system and checking the excessive credit growth", the central bank said in a statement.

The move, which will take effect on Sept. 25, comes after China reduced the tax on interest income to 5 percent from 20 percent from Aug. 15, and raised the benchmark interest rate for four times this year.

Experts said the frequent use of such macro-control tools showed the government's determination to curb the excess liquidity and rising inflation.

"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 would also help China stabilize the soaring prices," he said.

The consumer price index (CPI), China's key inflation indicator, went up to a 33-month high of 5.6 percent in July, with analysts predicting the index will be even higher in August.

Li Huiyong, senior analyst at Shenyin & Wanguo Securities, predicted the CPI would be 5.8 percent in August and peak in October, while the DBS Bank said in a latest report that August CPI would exceed six percent.

"There's little space for China to further raise its high interest rates as the world's major economies are considering interest rate reduction," said Zhao Qingming, head of China Construction Bank's research department.

For the reserve requirement ratio, he said, there was still space for further hikes because the 12.5-percent ratio was 0.5 percentage points short of the historical record a decade ago.

China's foreign exchange reserves reached US$1.33 trillion at the end of June, up 41.6 percent over the same period last year.

A total of US$266.3 billion as added in the first half of 2007, compared with a rise of US$247.3 billion for the whole of 2006.

Meanwhile, China's money supply is staying at a high level, with M2 which covers cash in circulation plus all deposits rising 18.5 percent in July over the same period last year.

The country's commercial banks lent 2.77 trillion yuan (US$369.33 billion) from January to July, equivalent to 90 percent of last year's total.

(Xinhua News Agency September 6, 2007)

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