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Reserve Requirement Ratio to Rise by 0.5%
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China is to once again raise its reserve requirement ratio by half a percentage point for commercial banks, taking it to 12 percent from Aug. 15, the People's Bank of China (PBOC) announced on Monday.

"This move comes as no surprise given that every economic index is overheating," said Song Guoqing, an economist with Beijing University.

"However, half a percentage point is not enough – it will not be able to absorb the new influx of foreign exchange reserves," Song added.

"China's forex reserves rise by around US$30 billion a month while loans for commercial banks topped 25 trillion yuan at the end of June," Song explained. "This means that a half-percentage point rise can only absorb 125 billion yuan a month."

China's gross domestic product (GDP) rose by 11.5 percent in the first half, after a major 11.9 percent growth spurt in the second quarter, according to official data.

This is the sixth successive rise of reserve requirement ratio as authorities scramble to curb China's excess liquidity. This latest one comes on the heels of an interest rate hike announced last Friday in which China raised the one-year benchmark deposit and lending rates by 27 basis points to 3.33 percent and 6.84 percent respectively.

Meanwhile, the State Council, or cabinet, announced last Friday that taxation on bank saving interests would be slashed from 20 to five percent from Aug. 15.

However, the measures, aimed at curbing excessive liquidity, barely caused a ripple in the Chinese stock markets, which continued to rise despite almost universal falls around the world.

On Monday, the benchmark Shanghai Composite Index hit a record 4,440.77 points while the Shenzhen Component Index closed hit a record 15,060.86 points

"The measures just can't catch up with the overshooting economy," Song said, "so there will be more policies coming out."

The central bank said the move sought to "strengthen management of liquidity in the banking system and rationalize lending growth".

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

The first half of 2007 saw a further US$266.3 billion poured into the national forex reserves, US$144 billion more than a year ago, said the central bank. This six-month rise is higher than the total US$247.3 billion rise for 2006.

Guo Tianyong, director of the Central University of Finance and Economics’ Chinese Banking Research Center, said higher deposit reserve ratios will retrench the capital held by banks, so as to cap bank loans and bring excess liquidity under control.

According to the central bank, China's commercial banks lent up to 2.5 trillion yuan (US$329 billion) in the first half of the year, approaching 80 percent of last year's total. In June alone, the monthly total of approved loans reached a staggering 451.5 billion yuan (US$59.4 billion).

Among other measures, the central bank has raised the benchmark interest rate of RMB deposits and loans three times this year.

In a statement in early July, the central bank stated its intentions to observe prudent monetary policies, to tighten control over bank liquidity to balance the liquidity level and prevent excessive growth in monetary credit.

With rising inflation seeming to go unchecked, many agencies are expecting more control policies to prevent the overheating of China's economic growth in the second half.

Ten agencies including City Group, Beijing University and several securities companies have forecast that China's economic growth rate could hit 11.8 percent in the third quarter, with the CPI rising 4.5 percent.

(Xinhua News Agency July 31, 2007)

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