No pills to treat Beijing's headache over required reserves

Beijing's relaxation of interest rate controls has left cutting banks' required reserves as the chief monetary tool to counter a slowdown, focusing attention on an option used in the past decade only during financial crises.

Once again we have the bureaucrats in Beijing pretending to be in calm, masterful control of the economy while in practice they are frantically rushing from leak to leak in a dam that always threatens to break.

Statutory reserves are an old-fashioned tool of monetary control. The idea is that every time you make a deposit your bank sets a small proportion of it aside with your economy's central bank where it remains unused. This acts as a necessary brake on the circulation of money.

But central banks these days mostly use more flexible tools for the purpose, such as capital adequacy ratios for lenders, discount interest rates for advances to commercial banks and open market operations to purchase or sell government debt.

A rising number of countries including Britain, Canada and Australia have now abolished statutory reserves as no longer needed, while in the United States they are imposed only on checking accounts and in the entire euro zone the required level is only 1 per cent.