labels: economy - general, banks & institutions
China raises cash reserve ratio for banks to 10 per cent news
17 February 2007

Mumbai: China has raised cash reserve requirements for banks – the amount of money they have to set aside against loans – for the fifth time in eight months to rein in inflation and cool investment in the world's fastest-growing economy.

The People's Bank of China said in a statement that lenders must put aside 10 per cent of deposits beginning February 25, against 9.5 per cent at present.

The central bank expects the 0.5 percentage point increase in the reserve ratio to reduce the amount available for lending with banks by 150 billion yuan ($19.4 billion).

China's economy, the world's fourth largest, expanded 10.7 per cent last year, more than triple the pace of growth in the US.

Consumer prices rose by 2.8 per cent and 2.2 per cent, respectively, in December and January.
While producer prices rose the highest in five months in January, investment and lending is also seen rebounding, which would increase the risk of accelerating inflation, the central bank said.

Growth in loans accelerated to 16 per cent in January, from 15.1 per cent the previous month, the statement said.

The People's Bank raised the key lending rate in April and August, by 0.27 percentage point each time. The benchmark now stands at 6.12 per cent.

Record export earnings are pumping cash into China's financial system, raising the risk of boom-and-bust cycles in the economy.

China's trade surplus is expected to increase this year to $200 billion from $177.5 billion in 2006 while the US trade deficit with China reached a record $232.5 billion last year.

The yuan also rose to the highest – up 0.16 per cent to 7.7426 per dollar in Shanghai – since a link to the dollar ended in July 2005.

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China raises cash reserve ratio for banks to 10 per cent