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The 3rd time in 2011 China Raises Reserve Ratio for Banks
Author:Sino-report    Source:Sino-report    Number of clicks :     Update time:2011-03-18 20:11
Sino-report China Economic Observer

 BEIJING--China's central bank said Friday it will raise the share of deposits banks must hold in reserve by half a percentage point, the third increase this year, as inflationary pressures remain in the spotlight.

The increase, which takes effect March 25, comes after the country's consumer price index rose 4.9% in February, unchanged from January's 4.9% rise, and economists have warned that inflation pressures will stay strong in the coming months.

 "It is a less high-profile move than hiking interest rates would have been," said Mark Williams, an economist at research firm Capital Economics. "It shows that they are sticking to their policy of gradually pushing up the reserve requirement ratio."

Coming after an increase in interest rates by the Reserve Bank of India on Thursday, China's move "is another sign that the tragic events in Japan are unlikely to have a significant impact on policy decisions elsewhere in Asia," said Royal Bank of Canada economist Brian Jackson.

Based on deposit levels at the end of January, Friday's move should drain about 356 billion yuan ($54 billion) from the financial system, according to a Dow Jones Newswires calculation. It comes at the end of a week when the People's Bank of China has moved aggressively to mop up liquidity by issuing central bank bills, taking around 49 billion of liquidity out of the market.

Analysts had generally been expecting another increase in banks' reserve requirement ratio, though the timing of any move by the central bank is unpredictable. In a poll of 10 economists last month, six had predicted a reserve requirement ratio increase of 0.5 percentage point in March.

The PBOC raised the reserve requirement ratio six times last year, and benchmark lending and deposit rates three times since October. The previous reserve ratio increase took effect Feb. 24.

China's official reserve requirement ratio for most banks will be 20% after the latest move takes effect, based on the PBOC's public statements. However, the central bank is now forcing some banks that lend aggressively to hold even higher levels of reserves.

Liquidity conditions for Chinese banks have eased considerably since banks faced a cash shortage earlier this year, which may have set the stage for additional tightening by the PBOC.

Mr. Williams from Capital Economics said he expects the reserve requirement ratio could reach 22% by the end of the year.

"It's a tax on banks in a sense, it reduces their returns," he said.

"But the banks are sitting pretty at the moment with good spreads between deposit and lending rates."


—Wang Ming in Shanghai contributed to this article.
 

 

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