Money

China raises big banks' reserve ratio

(Agencies)
Updated: 2010-10-12 09:25

BEIJING - China has raised reserve requirements for six large commercial banks on a temporary basis, a move to drain cash from the economy but avoid over-tightening, Reuters reported on Oct 11.

The 50-basis-point increase, which takes required reserve ratios to 17.5 percent for the country's biggest lenders, is the first since May this year. The rise will be in place for two months before ratios are returned to their current levels, Reuters quoted sources as saying.

In the limited nature of the increase, the central bank is trying to strike a balance between controlling liquidity and maintaining flexibility lest the economy lose momentum.

The People's Bank of China, the central bank, declined to comment.

Related readings:  CBRC may require new bank loan reserve ratio  China's central bank to raise 0.5% reserve ratio  Central Bank likely to raise reserve ratio: Analysts  More bank reserve ratio hikes expected

The Reuters report said that the central bank was worried that capital inflows could be on the rise in the wake of broader dollar weakness, citing Xu Biao, an economist with China Merchants Bank in Shenzhen.

"The central bank has to take some pre-emptive moves to control asset prices and inflation risks," he was quoted as saying.

"On the other hand, the targeted and temporary move itself shows that the central bank is cautious about taking tightening steps. In other words, the central bank is reluctant to make any blanket tightening moves," Xu added.

Qing Wang, chief China economist at Morgan Stanley in Hong Kong, told Reuters that the reserve increase also suggests that bank lending is on the rise again after a year in which Beijing has clamped down on their issuance of credit.

"I suspect September loan growth was strong. Hot money inflows have been rising. But I don't think this is a tightening move. It's just part of liquidity management," he said.

"It's also good for managing inflation expectations."