Markets may take latest increase in required reserve ratio in stride

SHANGHAI - China's banking regulator will launch a thorough examination this year of loans extended over the past few years, and will tighten the issuance of banking licenses in response to global easing of liquidity, the Shanghai Securities News reported on Monday.

Chinese banks must conduct due diligence on their businesses and report any potential risks to the China Banking Regulatory Commission (CBRC), the newspaper reported, citing CBRC chairman Liu Mingkang.

The regulator will pay keen attention to "shadow banking" businesses as well as off-balance-sheet banking activities involving deals with trust companies in a bid to prevent the type of excessive leveraging that brought down Lehman Brothers, the article cited Liu as saying.

He reportedly said financial innovation should be based on demand from the real economy, rather than on financial models alone, and should not only benefit the banks selling such products.

Chinese markets are likely to take Sunday's required reserve increase for banks in stride, as huge quantities of cash continue to flow into the financial system through maturing central bank bills and from overseas.

The People's Bank of China (PBOC) on April 17 raised the required reserve ratio for banks for the seventh time since last October, to a record 20.5 percent.

While the move will soak up about 360 billion yuan ($55.1 billion) that could otherwise have been lent out, nearly 450 billion yuan in central bank bills and repos will mature in the next two weeks alone, which is one reason many traders had expected the increase in required reserve ratio.

Reuters

(China Daily 04/19/2011 page22)