China raises required reserves for third time in 2006

China raised commercial banks' reserve requirements on Friday for the third time in five months to soak up more of the money gushing into the banking system from the country's huge balance-of-payments surplus.
The People's Bank of China (PBOC) said on its Web site (www.pbc.gov.cn) that it was increasing the proportion of deposits that banks must hold in reserve at the central bank by 0.5 percentage point, effective from November 15.
"Although the problem of excessive liquidity has been alleviated somewhat, China still faces a striking surplus in its international payments. Fresh excessive liquidity is still being generated," the central bank said in statement.
The increase takes the standard reserve requirement to 9.0 percent for big state lenders and joint-stock banks and to 9.5 percent for smaller institutions. The central bank announced similar increases on June 16 and July 21. Each half-point rise forces banks to tie up some 150 billion yuan ($19 billion) that they could otherwise lend out.
The PBOC has also increased interest rates twice since late April to tackle rapid credit growth and slow an economy that is on track to log double-digit growth in 2006 for the fourth year in a row. "For me it's a signal that the bank is really trying to do something about the ample liquidity in the system. It's a positive signal that they are trying to do something to tackle the overheating risk," said Oliver Stoenner, asset allocation strategist at Cominvest in Frankfurt.
China has a balance-of-payments surplus of about 10 percent of gross domestic product, generated principally by a fast-growing trade surplus. This is on track to exceed $140 billion in 2006, up from $102 billion in 2005, when it tripled.
The central bank, in order to hold down the yuan, buys most of the dollars that flow into China from the surplus. This intervention had boosted China's foreign currency reserves to $987.9 billion by the end of September.
The PBOC issues huge volumes of bills to sterilise, or absorb, the yuan it issues in exchange for the dollars it buys. Economists say the central bank has done a fairly good job with these sterilisation operations, but most had forecast that another increase in reserve requirements would be necessary to prevent the torrent of cash from pumping up the money supply.