Chinese Reserve Ratio at 20 year high

Nov 12, 2007

RESERVE RATIO AT 20-YEAR HIGH
Regional fallout expected as China curbs lending again

BEIJING - ASIA'S financial markets are bracing themselves for the fallout after China ordered banks to put aside more reserves for the ninth time this year to cool a red-hot economy, stock and property markets.

The 0.5 percentage point rise in banks' reserve ratio will take effect on Nov 26 and bring the ratio for big banks to a record 13.5 per cent, the central bank said last Saturday. The ratio is now the highest since at least 1987.

The hike in the reserve requirement means that commercial banks must retain more of their deposits, rather than lending the funds out in the broader economy. Along with reserve increases, the central bank has also been notching up deposit and lending rates, with five hikes this year, to discourage lending.

Despite the moves, money is pouring into China, brought in by hugely successful export industries and by Chinese and foreigners hoping to cash in on the boisterous economy, the rising value of the currency and a stock market whose main index has increased six times in value in two years.

For most of the year, China's banks have largely shrugged off the ordered increases in required reserves. But recent volatility suggests that the latest hike could have a substantial impact on the markets.

China's main stock index, which more than doubled to last month's all-time high, plunged 8 per cent last week, its biggest weekly drop this decade.

Short-term interest rates in the money market also jumped to multi-year highs as cash-strapped smaller banks scrambled to raise funds.

Last Saturday's move came two days after the central bank issued its strongest warning so far this year about rising prices. Some government officials and economists worry that, if inflation is left unchecked, it could spill over into the wider economy, though it has been largely confined to food prices so far, and hastily-made loans could sour, leaving banks saddled with higher debts.

REUTERS, BLOOMBERG NEWS