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China raises CRR for banks for sixth time in less than a yearnews
05 April 2007

Mumbai: China has ordered an increase in the cash reserves of deposits against lending by banks for the sixth time in less than a year to rein in inflation and investment in the world''s fastest-growing economy.

China''s central bank, The People''s Bank of China, raised the deposit reserve ratio by 0.5 percentage point to 10.5 per cent starting April 16, a statement on its web site said.

The central bank is keeping up its relentless pace of monetary tightening by ordering banks to tie up more of their deposits in reserve instead of lending them out.

It was the third increase in reserve requirements so far this year and came less than three weeks after the central bank raised benchmark interest rates to try to keep the world''s fourth-largest economy on an even keel.

The central bank is striving to mop up cash spun off from China''s record trade surplus, which tripled to $39.64 billion in the first two months of 2007, compared with the same period a year earlier.

"The People''s Bank of China will continue to implement stable monetary policy, use different tools to enhance liquidity management in the banking system, keep liquidity at an appropriate level and avoid excessive growth in the money supply and credit," the central bank said in a statement.

A 0.5 percentage point increase removes about 170 billion yuan ($22 billion) from the financial system, reducing the funds banks have available to lend.

China''s economy may grow as much as 11 per cent in the first quarter, the State Information Center said in a report last month. The center is a research unit of the National Development and Reform Commission, the government''s top economic planning agency.

Money and credit growth rose sharply in January and February, reviving fears of a reacceleration in investment in fixed assets such as factories and flats that would undermine a year-long central government drive to curb wasteful capital spending.

China had raised bank reserve ratios on February 25. The central bank lifted the benchmark one-year lending rate to 6.39 per cent from 6.12 per cent on March 18.

The central bank prints yuan to convert foreign currency derived from exports of clothes, electronics and steel. It then sells treasury bills to lenders to remove money from the financial system.

That tool is less attractive to the government than lifting bank reserve requirements because it costs more. The People''s Bank of China pays lenders 1.89 per cent interest for reserves lodged with it, less than the yield on one-year government paper.


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China raises CRR for banks for sixth time in less than a year