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China raises reserve ratio requirement to 13.5 percent

BEIJING - China’s central bank announced on Saturday that it would raise the reserve ratio requirement for banking institutes by half a percentage point to 13.5 percent as of November 26.

The People’s Bank of China made the move “in order to strengthen the management of liquidity in the banking system and curb the excessive growth of credit,” it said in a statement on its website.

The hike follows a similar half percentage increase in the reserve ratio on October 25. Saturday’s move will be the ninth such time the bank has raised the reserve ratio this year.

The hike comes amid widespread expectations that the bank will raise interest rates after it forecast Thursday that China’s economy would grow at a blistering pace of over 11 percent this year, while inflation would rise by 4.5 percent in 2007.

The reserve ratio requirement is the amount of money that commercial banks must hold in reserve. By raising the requirement, the bank is hoping to sop up excess liquidity that is fuelling fast paced growth.

Beijing is struggling to put the brakes on the world’s fourth-largest economy, which roared ahead by 11.5 percent both in the third quarter and the first nine months of the year.

Meanwhile, inflation surged by 4.1 percent in the first nine months of 2007, up from 1.5 percent last year.

“These rate hikes have been effective. Economic growth is relatively fast, but it’s not a rapid, continuous, and unsustainable growth,” Qi Jingmei, a Beijing-based economist with the State Information Centre, told AFP.

“Growth has slowed down steadily through the third quarter. Both investment and export growth have fallen slightly, which is positive for the economy.”

The reserve hike comes after the central bank announced a 27 basis point rise in deposit and lending interest rates on September 14, the fifth interest rate hike of the year.

Xu Jin, a Shanghai-based economist with Shanghai Securities, said the reserve rate hike was expected as it would help absorb liquidity but would not result in an inflow of foreign hot money like an interest rate rise would do.

“The economy is fast-biased, but I don’t think we can say it’s overheated,” Xu said.

“An interest rate hike is a hard decision for China, as more interest rate hikes would bring more foreign hot money into the country, which would make it more difficult to control liquidity.”

Despite repeated measures to cool growth largely driven by excess cash in circulation, China’s economy expanded by 11.9 percent in the second quarter after registering 11.1 percent growth in 2006.