Bank in fresh bid to curb liquidity

By Zhang Fengming  |   2008-6-8  |     NEWSPAPER EDITION

CHINA yesterday said it would raise the reserve requirement ratios twice this month to curb liquidity, but with the earthquake-hit area exempted from the tight money control.

The reserve ratio - the amount of money a bank must put at the central bank - will rise 1 percentage point to 17.5 percent on yuan deposits after each increase of 0.5 percentage point effective from June 15 and June 25, the People's Bank of China said on its Website yesterday.

The increase is the fifth so far this year. It is also rare for the central bank to raise the mark twice a month, indicating that the central bank is applying a tight fist to curb lending.

"The measure is made to better banks' liquidity management," the central bank said, without elaborating.

Financial institutions in the areas hit by the devastating May 12 earthquake will be exempt from the tight control.

The central bank applied a similar policy with the May 20 reserve increase, leaving banks in the quake-hit area facing a ratio of 16 percent.

Analysts said the threat of inflation and the strong money supply were the main reasons for the tight measures this time.

Hua Qi, a Pacific-Antai Life Insurance Co investment analyst, said the move is aimed at strong liquidity growth amid the strong inflow of hot money.

"The bond prices in interbank bonds markets grew recently, which is against the rule that bonds prices should drop during high inflation," said Hua. "This indicated that the interbank system is ample with money, which shored up bonds prices."