Re­serves ra­tio may rise to record high in China

The Pak Banker - - Front Page -

SHANG­HAI: The cen­tral govern­ment could raise the ra­tio of re­serves it re­quires banks to hold against their loans to 23 per­cent in 2011, as it con­tin­ues to try to curb in­fla­tion­ary credit growth in the fi­nan­cial sys­tem, Lu Zheng­wei, chief econ­o­mist at In­dus­trial Bank, said. The fig­ure would be the high­est re­serve re­quire­ment ra­tio ever set by a cen­tral bank, Lu said.

Zhang Xiao­hui, head of Mon­e­tary Depart­ment of the Peo­ple's Bank of China, the coun­try's cen­tral bank, said in an ar­ti­cle ear­lier this year that the ceil­ing for a cen­tral bank's re­serve re­quire­ment ra­tio is 23.5 per­cent.

"The loose mon­e­tary pol­icy in the United States, overliq­uid­ity in the do­mes­tic mar­ket and ris­ing wages present an un­prece­dented task for China to man­age its ex­ces­sive liq­uid­ity and in­fla­tion next year," Lu said in a speech at the Sec­ond China For­tune and As­sets

Fo­rum

on Man­age­ment Tues­day.

He said he ex­pects the cen­tral bank to raise the re­serve re­quire­ment ra­tio once a month in the first quar­ter of 2011.

The po­ten­tial 4.5 per­cent­age point in­crease from the cur­rent 18.5 per­cent would lock up at least 1.3 tril­lion yuan ($195 bil­lion) that could oth­er­wise be in­jected into the econ­omy in the form of loans, trig­ger­ing in­fla­tion.

In Novem­ber, China's con­sumer price in­dex (CPI), a main gauge of in­fla­tion, rose 5.1 per­cent year-on-year, the fastest clip in 28 months and up 0.7 per­cent­age point from Oc­to­ber's 4.4 per­cent.

An­a­lysts said ex­ces­sive liq­uid­ity is the main con­trib­u­tor to China's price surges. In the first 11 months, the num­ber of new loans to­taled 7.45 tril­lion yuan, near­ing the govern­ment's 7.5-tril­lion-yuan ful­lyear tar­get.

Mean­while, the coun­try's for­eign ex­change re­serves rose $194 bil­lion in the third quar­ter, far ex­ceed­ing the $66 bil­lion trade sur­plus and $23 bil­lion for­eign di­rect in­vest­ment made dur­ing the same pe­riod. Part of the dif­fer­ence could be spec­u­la­tive cap­i­tal flow­ing into the coun­try, an­a­lysts said.

To check in­fla­tion and ab­sorb ex­ces­sive liq­uid­ity, the cen­tral bank raised the re­serve re­quire­ment ra­tio six times this year, while an­nounc­ing the first in­ter­est rate hike in nearly three years in Oc­to­ber.

In ad­di­tion, the 21st Cen­tury Busi­ness Her­ald re­ported on Tues­day that the China Bank­ing Reg­u­la­tory Com­mis­sion has or­dered some banks to halt fixed-as­set loans by the end of the year. De­spite the ex­pected tight­en­ing mea­sures next year, Lu be­lieves the CPI will be gen­er­ally on an up­ward track for the whole of 2011 and will be around 5 or 6 per­cent. -PB News

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