Reserve-ratio increase proves surprise
By Zhang Fengming |
January 13, 2010, Wednesday
|
Print Edition
Print Edition
CHINA yesterday asked banks to freeze more money from lending for the first time in more than a year in a surprising early reserve requirement increase that may signal a pending interest rate lift.
The reserve ratio - the amount of money a bank must deposit with the central bank- will increase 0.5 percentage points on yuan deposits starting next Monday, the People's Bank of China said yesterday.
The increase is the first rise since December 25, 2008.
Rural cooperatives were exempt from the increase to support the development of farming areas especially during the spring planting season, the central bank said.
Economists said they expected two to three more reserve increases this year and an interest-rate increase was likely in the second quarter.
"The ratio rise sends a signal to the market of the central bank's strategy," said Li Wei, a Standard Chartered Bank economist.
"It's significant in showing the flag of tightening rather than of taking a firm hand to trim liquidity as an interest-rate increase will do."
China's big-five state-owned banks will meet a ratio requirement of 16 percent, while small banks are required to put aside 14 percent of their capital.
The reserve-requirement increase will help drain 200 billion yuan (US$29.29 billion) to 300 billion yuan from the market, but economists believe this is not enough.
The PBOC yesterday raised the returns on its 20-billion-yuan central bank one-year bills by a bigger-than-expected 0.08 percentage point to 1.8434 percent. It was the first increase in this area since last August.
It was the second rate lift in a week on central bank bills.
The central bank has also drained a record 200 billion yuan via a 28-day bond-repurchase agreement.
Tightening measures traditionally come in three tiers: first in open-market operations, second inthe reserve ratio and finally ininterest rates.
In previous years, reserve requirement increases were inevitably closely followed by interest rates rises in China.
However, it may take some time to see interest rates rise this year, Li said.
"The central bank has to factor in the concern over hot money, making an immediate interest rate increase not very likely," he said.
The lifting of interest rates will increase returns on the yuan, which is expected to appreciate again this year, attracting speculative money flow into China.
The State Council, China's Cabinet, said on Sunday that close attention should be paid to cross-border activities to avoid hot money inflating property prices.
The PBOC said it would continue a relatively loose monetary policy this year to support economic growth.
The reserve ratio - the amount of money a bank must deposit with the central bank- will increase 0.5 percentage points on yuan deposits starting next Monday, the People's Bank of China said yesterday.
The increase is the first rise since December 25, 2008.
Rural cooperatives were exempt from the increase to support the development of farming areas especially during the spring planting season, the central bank said.
Economists said they expected two to three more reserve increases this year and an interest-rate increase was likely in the second quarter.
"The ratio rise sends a signal to the market of the central bank's strategy," said Li Wei, a Standard Chartered Bank economist.
"It's significant in showing the flag of tightening rather than of taking a firm hand to trim liquidity as an interest-rate increase will do."
China's big-five state-owned banks will meet a ratio requirement of 16 percent, while small banks are required to put aside 14 percent of their capital.
The reserve-requirement increase will help drain 200 billion yuan (US$29.29 billion) to 300 billion yuan from the market, but economists believe this is not enough.
The PBOC yesterday raised the returns on its 20-billion-yuan central bank one-year bills by a bigger-than-expected 0.08 percentage point to 1.8434 percent. It was the first increase in this area since last August.
It was the second rate lift in a week on central bank bills.
The central bank has also drained a record 200 billion yuan via a 28-day bond-repurchase agreement.
Tightening measures traditionally come in three tiers: first in open-market operations, second inthe reserve ratio and finally ininterest rates.
In previous years, reserve requirement increases were inevitably closely followed by interest rates rises in China.
However, it may take some time to see interest rates rise this year, Li said.
"The central bank has to factor in the concern over hot money, making an immediate interest rate increase not very likely," he said.
The lifting of interest rates will increase returns on the yuan, which is expected to appreciate again this year, attracting speculative money flow into China.
The State Council, China's Cabinet, said on Sunday that close attention should be paid to cross-border activities to avoid hot money inflating property prices.
The PBOC said it would continue a relatively loose monetary policy this year to support economic growth.
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