China tells banks to hold yet more cash in reserve

BEIJING (Reuters) - China on Wednesday raised the proportion of deposits that banks must hold in reserve for the eleventh time since the start of 2007, extending a long-running campaign to mop up excess cash in the banking system.

The 0.5 percentage point increase in the reserve requirement ratio will take effect on January 25, the People's Bank of China (PBOC) said on its Web site, www.pbc.gov.cn.

That takes the ratio for big banks to a record 15 percent.

"It's no real surprise. Liquidity growth related to the trade surplus and government expenditure was super strong in December," said Ben Simpfendorfer, a strategist at Royal Bank of Scotland in Hong Kong.

In contrast to many other central banks, the PBOC is grappling with how to keep a flood of liquidity that is entering the economy through its huge trade surplus from stoking inflation and causing the economy to overheat.

The trade surplus surged nearly 48 percent in 2007 to $262.2 billion and annual consumer inflation hit an 11-year high of 6.9 percent in November.

The PBOC said the increase was aimed at slowing money and credit growth and at strengthening liquidity management. It last announced a reserve requirement increase on December 8, when it was raised by a full percentage point.

The central bank also raised interest rates six times last year, most recently on December 20.

Zhao Qingming, an economist at China Construction Bank in Beijing, said that the central bank was right to act to pre-empt a surge in lending, which typically takes place in the first few months of the year.

WEATHERING THE STORM

"Judging from historical and international levels, China's bank reserve ratio of 15 percent now is indeed high," Zhao said. "But I don't think there should be a cap to it. As long as it's needed to curb excess liquidity the ratio could go as high as it has to."

The central bank could also raise interest rates again before the Lunar New Year in early February if inflation remains pronounced, Zhao added.

Official sources told Reuters on Monday that the December CPI reading, due to be released next week, would be 6.5 percent. While that would mark an easing from November's annual increase, analysts said that would still represent a significant increase in prices from the previous month.

Qu Hongbin, HSBC's chief China economist, told reporters earlier on Wednesday that the reserve ratio could rise as high as 19 percent this year, although a U.S. slowdown could force Beijing to ease up somewhat on tightening.

Still, Premier Wen Jiabao on Wednesday exuded confidence about the government's ability to steer through any turbulence.

"There are many uncertainties influencing the world economy. Global financial markets are unstable, oil prices remain high and agricultural products are also getting dearer," state radio cited Wen as telling overseas Chinese businessmen.

"I'm confident in telling you that China has made good preparations to face them. We will step up our efforts to restructure the economy and promote a shift in the economic growth model."