China raises bank reserves requirement

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The Independent Online

China took fresh steps to slow its red-hot economy yesterday, just days after official figures showed growth was running at its fastest pace for a decade.

The central bank raised commercial banks' reserve requirements for the second time in a month in a bid to withdraw some of the cash flowing through the system. The People's Bank of China (PBOC) said it was increasing the proportion of deposits big banks must hold in reserve, rather than lend out, by 0.5 of a percentage point to 8.5 per cent, effective from 15 August.

The move came five weeks after it raised the limit from 7.5 per cent and falls almost exactly a year after a landmark 2.1 per cent revaluation of the yuan and an accompanying shift from a dollar peg to a managed float.

Monica Fan, the head of global foreign exchange strategy at RBC Capital Markets, said: "This was targeted at curbing speculative investment in housing, and we expect further increases in the reserves requirements are likely."

Earlier this week, Beijing revealed that the economy grew at an annual rate of 11.3 per cent in the second quarter, making it the strongest growth since 1994.

Zhang Haiyu, research director of a think-tank at the National Development and Reform Commission, said tougher reserve requirements were more effective than interest rates in soaking up excess liquidity.

"If the economy keeps growing at a pace of around 11 per cent this quarter, the reserve ratio will be further increased," he told Reuters. "I think 9 to 10 per cent is an appropriate level."

Investment is growing at 30 per cent a year, money supply is expanding well above target and last month China recorded a record $14.5bn (£7.8bn) trade surplus.