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Wang Xiangwei

Lenders' minimum reserve requirements raised

The central government yesterday gave the strongest signal yet of its determination to cool an economy that has shown signs of overheating, by raising reserve requirements for banks and other deposit-taking financial institutions to stave off inflation and reduce lending risks.

The People's Bank of China (PBOC) said the ratio of deposits commercial banks must place with the central bank would be increased to 7 per cent from 6 per cent, effective from September 21.

This means about 150 billion yuan (HK$141 billion) would be taken out of circulation, the PBOC said.

Calling the measure mild, the central bank said the move was aimed at preventing  money supply  rising too fast and providing a stable monetary and financial environment.

It is the second time  the bank has acted to slow down the rapid expansion in the money supply. In June, the central bank ordered commercial banks to tighten lending to property developers and buyers of luxury housing to let some of the air out of the property market bubble.

Some economists welcomed the latest move.

'The step is small but it should send a very powerful message to local authorities that are boosting the local economies with bank loans,' said Shawn Xu Xiaonian, head of research at China International Capital Corporation (CICC).

Mr Xu is among a group of leading mainland economists who are warning that the economy is showing  signs of overheating, drawing a parallel to the overheating in 1993.

The central bank said broad money supply was up 20.8 per cent at the end of June, with the growth rate 12 percentage points higher than gross domestic product growth and inflation combined.

In June, banks lent  525 billion yuan - the highest monthly figure.

'The central government has begun to sound warnings about overheating in the economy since the first quarter of this year but it has been ignored by the local authorities,' Mr Xu said. 'This is the first year of the new leadership taking over and local officials are trying their best to prove themselves by boosting investments. The economy is definitely overheating.'

Fixed-asset investment, a broad benchmark of economic activity, rose 32.7 per cent in the first seven months, according to the latest official statistics.

Mr Xu said the rapid growth was comparable to that in 1993 when then vice-premier Zhu Rongji instituted drastic austerity measures to rein in bank loans and cool down the economy.

Central government officials including PBOC governor Zhou Xiaochuan have warned of possible inflation and more bad loans due to excessive growth in bank lending.

Ma Kai, minister of the State Development and Reform Commission, has warned of overinvestment and overheating in the manufacturing sector  and the property market.

The central bank said yesterday the rise in reserve requirements would apply to all commercial banks and other deposit-taking financial institutions except  rural and urban credit co-operatives.

It said the move would not lead to a decline in lending by financial institutions in the second half of this year, as there would be plenty of liquidity in the financial system.

By the end of June, the mainland's foreign exchange reserves were US$346.5 billion, up US$60.1 billion from the end of last year.

Meanwhile, the central bank said 'unreasonable expectations' that China would allow the yuan to strengthen against the US dollar had caused a flow of short-term  capital into the mainland. 'Thus, the money supply would have expanded further if relevant measures were not adopted,' it said.

The mainland's economy grew 8.2 per cent year on year in the first half of this year and is widely expected to surpass its target growth rate of 7 per cent for the whole year.



Central bank acts to prevent overheating