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'There is still room' to raise reserve ratio

By Hong Guan (China Daily)
Updated: 2007-05-08 10:39

There is still room to raise reserve requirements for banks after previous hikes failed to slow lending and inflation, the central bank governor has said.

Zhou Xiaochuan also said inflation is manageable but acknowledged he was concerned about bubbles building in the stock market.

China has tried to rein in excess liquidity in the financial market by raising the reserve requirement ratio, selling central bank bills and raising interest rates over the past year.

But there is surely scope to raise the reserve requirement ratio the amount of money banks must hold with the central bank Zhou told reporters on Sunday on his way to Frankfurt for a meeting of the Bank for International Settlements in Basel, Switzerland.

The People's Bank of China raised the reserve ratio on April 29 to 11 percent from 10.5 percent the seventh time since last July which will take effect on May 15. The central bank has also raised interest rates thrice since last April.

Economists forecast the central bank may take further steps to soak up liquidity in the coming months, pushing the ratio to 12 percent or even higher.

They largely base their outlook on China's soaring economy, which has shown few signs of slowing down.

In the first quarter, the gross domestic product grew by 11.1 percent from 10.4 percent in the previous quarter. Inflation reached 3.3 percent in March, the highest in more than two years which breached the warning signal of 3 percent set by the central bank.

Meanwhile, banks extended 1.4 trillion yuan ($181.4 billion) of new loans in the first quarter, nearly half the total of last year.

Gao Shanwen, chief economist with Anxin Securities, however, said the inflationary pressure is not too grim. The indices of consumer prices, producer prices and investment, are all within acceptable range, he said after the central bank announced higher bank reserve requirements rather than the widely anticipated interest rate hike.

Some economists hold the adjustment in the reserve requirements will lose its effectiveness in taming liquidity as the market has become used to it; and advocated raising the interest rate.

Shen Minggao, an economist with the Citigroup in Beijing, said the hike in the reserve ratio increased the possibility of an interest rate hike in the second quarter.

On inflation, Zhou said the recent acceleration was "normal," according to Bloomberg. "We can't say there is no inflationary pressure, but it was not very unexpected."

There is "no evidence that inflation will go out of control," Zhou told reporters in Basel.