China's Central Bank to Raise Deposit Reserve Ratio to 11%

The required reserve ratio for financial institutions engaged in deposit business will be raised by 0.5 percentage point as of May 15 to 11 percent, the People's Bank of China said on Sunday.

This is the fourth time the central bank has raised the deposit reserve ratio this year and the seventh time since last year in an effort to rein in excessive liquidity and cool the booming economy.

The central bank raised the bank deposit reserve ratio by the same margin in June, August and November last year and in January, February and April this year.


The increase in the reserve requirement comes after China reported surges in inflation, loans, investment, and gross domestic product in the first quarter of the year.

China's economy expanded 11.1 percent in the first quarter of the year, compared with 10.4 percent in the fourth quarter of last year.

The consumer price index was up 3.3 percent in March, the highest in more than two years, and beyond the target of 3 percent set by the Chinese government for the year.

"The increase in the reserve requirement is necessary and timely to help reduce inflationary pressures," said Cai Zhizhou, are searcher with Peking University.

The move also showed the central bank's determination to tighten liquidity, a major problem threatening China's economy.

China is facing rising pressure this year to curb excessive liquidity which is largely the result of the country's expanding trade surplus. China's M2, the broad measure of money supply, jumped 17.3 percent to 36.4 trillion yuan at the end of March. Its trade surplus reached 46.4 billion yuan in the first quarter, double that of the same period last year.

"Raising the reserve ratio is a rather easy and flexible measure for the central bank, but it might need to raise interest rates if the nation's strong economic momentum and inflationary pressures continue in the second quarter," said Wang Xiaoguang, a researcher at the Economy Research Institute of the National Development and Research Commission, the top economic planner.

The State Council, or cabinet, on April 18 took more urgent measures to reduce excessive liquidity. On March 18, the central bank raised the one-year benchmark interest rate by 0.27 percentage point.

Li Xiaochao, spokesman of the National Bureau of Statistics, said recently that China is running the risk of shifting from relatively fast economic growth to an over-heated economy.

Li acknowledged that the Chinese government should take more small steps to ensure a stable and fast economic growth, rather than introduce drastic cooling measures.

(Photo source: Google/People's Bank of China)




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