International | Apr 30 2007
By Chris Shaw
With the country’s economic growth continuing to surprise on the upside the People’s Bank of China (PBOC) has again lifted the reserve requirement ratio for the banking sector, this time by 0.5% to 11.0%.
It marks the seventh such increase in the past ten months and the second this month, GSJB Were suggesting the move highlights the difficulties the PBOC is facing in attempting to control monetary policy in what is a very open economy with a significantly undervalued currency.
Barclays Capital points out the increases to date have done little to curb the economy, as economic growth for the March quarter increased to 11.1% from 10.4% in the December quarter, while inflation is now at a two-year high of 3.3%.
The group suggests the next step is to lift official interest rates and to allow the currency to appreciate faster, as the increases in reserve requirements are simply not having the desired impact.
GSJB Were agrees, as it notes increasing reserve requirements simply doesn’t impact on the ability of banks to lend money and increasing interest rates would be a more effective policy tool. Despite this, it sees potential for a further three hikes over the course of 2007.
JP Morgan takes the view the latest increase in reserve requirements effectively puts off the chance for a rate hike in the short-term, particularly as the PBOC has already lifted official interest rates three times in the past year.
While not expecting the latest increase in reserve requirements to have a great impact on liquidity levels in the economy, the broker suggests it may at least go some way towards stopping the excess liquidity situation from getting any worse.
