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December 23, 2009

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Zhou's remark triggers talk banks' reserve ratio may rise

CHINA'S central bank governor said reserve ratios for lenders remain an important policy tool, fueling speculation there may be plans for a rise to curb risks of a liquidity-fuelled bubble.

Policy makers still put emphasis on banks having an adequate reserve requirement ratio, Zhou Xiaochuan, the governor of the People's Bank of China, said at a forum in Beijing yesterday. He said that policy makers won't target only consumer prices in policy making, but would also factor in economic growth, job creation and the imbalance in international payments.

The Consumer Price Index, the main gauge of inflation, rose 0.6 percent in November, the first climb in 10 months, triggering concerns of even higher inflation.

Zhou, however, didn't say that a reserve ratio increase was imminent.

China had put on hold its interest rates and reserve requirement ratios this year so as not to disrupt economic growth. The government said in late November that it would maintain the moderately loose monetary policy in 2010 to consolidate the economic growth.

Economists said a policy turnaround may occur in the second half of next year as the economy strengthens and exports improve, and the reserve requirement ratio can be the first weapon for the central bank to use to curb loan risks.

Lu Zhengwei, the Industrial Bank's senior economist, said he expects the central bank to rely more on quantitative measures such as reserve ratio requirement and interest rate increase of which there would be at most one hike of 0.27 percentage point in 2010.

In the first 11 months, banks in China have extended 9.21 trillion yuan (US$1.35 trillion) of local-currency loans, a rise of 5.06 trillion yuan from a year ago. The loans already surpassed the 5-trillion-yuan target for 2009.

Economists expect new yuan loans to top 9.5 trillion yuan this year and drop to around 8 trillion yuan in 2010 as a sharp fall is unlikely as the policy to consolidate economic growth will remain.


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