Quake-hit areas spared from 2 ratio increases

By Zhang Fengming  |   2008-6-9  |     NEWSPAPER EDITION

CHINA on Saturday said it would raise the reserve requirement ratio twice this month to curb liquidity but the move will not be imposed in earthquake-hit areas.

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 following increases of 0.5 percentage point effective from next Sunday and June 25, the People's Bank of China said on its Website on Saturday.

The increase is the fifth so far this year. It is also rare for the central bank to raise the ratio twice a month, indicating its strong determination to curb lending.

"The move to raise the ratio is made to enhance banks' liquidity management," the central bank said, without elaborating.

Exemption

But financial institutions in the areas hit by the May 12 devastating 8.0-magnitude earthquake in Sichuan Province will be exempted from the move.

The central bank gave similar treatment to banks in these areas when it raised the reserve ratio on May 20, with lenders there facing a ratio of 16 percent.

Analysts said the threat of inflation and strong money supply are the reasons for raising the ratio.

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

"The prices in the interbank bond markets have grown recently, which went against the trend that bond prices should drop during high inflation," said Hua.

"This indicated that the interbank system is ample with money, which shored up bond prices."

M2, the broadest measure of money supply, rose 16.94 percent in April, up 0.2 percentage point from the end of last year and up 0.65 percentage point from the level in March.

The central bank increased interest rates six times last year while the reserve ratio went up 10 times in a bid to cool the economy.