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China raises banking reserve ratio to 13 percent

BEIJING - China’s central bank announced on Saturday that it would raise the reserve ratio requirement for commercial banking institutes to 13 percent in a further effort to curb excessive liquidity.

The People’s Bank of China (PBoC) said in a statement on its website that it would raise the reserve ratio by 0.5 percent as of October 25, in a move to “strengthen liquidity management in the banking system and check the excessive credit growth.”

The reserve hike, which requires banks to set aside more money in reserves, was the eighth such rise this year.

Beijing is struggling to put the brakes on the world’s fourth-largest economy which is expected to register double-digit growth over the first three quarters when gross domestic product (GDP) figures are released later this month.

The reserve hike comes after the central bank announced a 27 basis point rise in deposit and lending interest rates on September 14, the fifth interest rate hike of the year.

Despite repeated measures to cool growth largely driven by excess liquidity, China’s economy expanded by a blistering 11.9 percent in the second quarter after registering 11.1 percent growth in 2006.

The rate adjustment come as preliminary third quarter data show that overheating will remain a problem for a government which has increasingly sought to rein in growth to curb inflation, already at a decade high.

On Friday, the customs bureau announced China’s accumulated trade surplus from January to September was 185.7 billion dollars, exceeding the 177.5 billion dollar surplus for all of last year.

The swelling surplus helped China’s foreign exchange reserves, already the world’s largest, to surge 45.1 percent in the first nine months of the year to 1.43 trillion dollars, the central bank added.

Crucial to further government measures will be the third quarter inflation data to be released later this month with other leading indicators, Credit Suisse economist Tao Dong said.

“We expect some stabilization in CPI (consumer price index) inflation in September, as pork prices have declined and base effect kicks in, so there is a 50:50 chance that the PBoC may opt to hold its fire (on interest rate hikes) for now,” Tao said.

But in the medium term, Tao said bank interest rates would rise as long as inflation ensured that negative real interest rates were exacerbating liquidity by forcing bank deposits into the property and stock markets.