labels: economy - general
China may further drain liquidity in the economynews
08 January 2007

Mumbai: China's central bank, which lifted bank reserve ratios four times in seven months in an effort to cool the world's fourth-biggest economy, is considering more steps to ease liquidity in the country's financial system.

``We never rule out the possibility of using further measures to curb liquidity,' the People's Bank of China governor Zhou Xiaochuan told reporters in Basel, Switzerland, during the bi- monthly meeting of central bank governors from the G10 nations. The bank is assessing ``which measure is appropriate for the current economic situation.' he added.

On January 5, the central bank raised the cash reserve requirements of banks in China to 9.5 per cent of deposits to prevent a rebound in lending and investment in factories and real estate.

The central bank also raised interest rates, sold bank bills and allowed the Chinese currency to strengthen in a bid to stop cash from record exports overheating the economy, which is growing at an annual rate of over 10 per cent.

The People's Bank had raised bank's reserve requirements by 0.5 percentage points each in June, July, November 2006 as well after leaving them unchanged for more than two years in the past.

The central bank estimates every increase in cash reserve requirements of 0.5 per cent to reduce the money available for lending by 150 billion yuan ($19 billion).

China also raised its base interest rate twice last year bringing it to 6.12 per cent.

The Chinese currency, yuan, has risen 5.9 per cent against the dollar after the China scrapped its decade-old peg to the US currency on July 21, 2005.

``We need to monitor further data to observe the effectiveness of the measures taken,' Zhou said. ``There is a little bit too much liquidity in the market at the moment,' he added.

The US and Europe still accuse China of keeping its currency undervalued to make its exports cheaper.

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China may further drain liquidity in the economy