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Central bank tightens bank credit

By Hu Yuanyuan (China Daily)
Updated: 2006-07-22 09:17

China announced a moderate increase in reserve requirement for banks on Friday in a further step to cool down excessive investment and credit growth.

Following a rise of 0.5 of a percentage point in the reserve requirement less than a month ago, the People's Bank of China (PBOC), the central bank, raised the reserve ratio for banks, excluding rural banks and co-operatives, by half a percentage point effective August 15.

That will bring the required reserve ratio for major banks, including the top four State-controlled lenders such as Hong Kong-listed China Construction Bank and Bank of China, to 8.5 per cent. The ratio is the proportion of deposits a bank is required to have with the central bank as a way of managing their lending capacity.

"The range of the hike is within our expectation of 0.5 to 1 percentage point," said Wang Yuanhong, a senior researcher with the State Information Centre, an influential government think-tank in Beijing.

He added: "I don't think that the central bank will raise the interest rate in the short term."

Wang said some economists' prediction of a 2 to 3 percentage-point interest rate hike is unreasonable. The central bank raised the benchmark lending rates by 27 basis points in late April.

"The macro control measures for this year feature a moderate and gradual pace, and the government will not rush to tighten the monetary policy instantly," said Wang, adding the investment and loan figures for July are a better indicator of how those measures work.

The further increase in reserve requirement for commercial banks followed economists' calls for another round of tightening after data showed that fixed-assets investment soared 29.8 per cent during the first six months of the year, 4.4 percentage points higher than that of the same period last year.

The investment surge was fuelled by rapid growth in money supply, which rose by 18.43 per cent year-on-year to 32.28 trillion yuan (US$4.03 trillion) by the end of June.

"The main purpose of this increase in reserve requirements is to prevent the excessive growth in credits," the PBOC said in a statement.