Bank reserve hike's impact remains unclear
By Zhang Dingmin (China Daily)
Updated: 2004-04-13 08:58

Analysts said yesterday that it remains unclear whether the recent rise in bank reserve requirements will be enough to curb inflation.

Although Sunday's half-a-percentage point rise got a more placid response from the market than last year's hike, the possibility of an interest rate rise remains on the agenda should the increased reserve requirements fail to slow down lending and break the back of inflationary pressures.

Although March's figures on key indicators such as money supply and the consumer price index (CPI) are yet to be published, analysts expect the numbers will remain in the fast lane.

"That (Sunday's bank reserve rise) indicates money supply growth is still probably very fast," said Wang Yuanhong, a senior analyst at the State Information Centre (SIC). "That can also be seen in other relevant indicators," he added.

Chinese banks lent aggressively last year in order to tap into the nation's robust economic activity, pushing money supplies to high levels, this sparked concerns that accelerating prices may erode economic activity.

The nation's central bank, the People's Bank of China, raised bank reserve requirements by 1 percentage point - to 7 per cent - in September last year, a move aimed at restricting banks' lending capacity.

Loan growth subsided slightly in the following months, but recovered again in the first two months of 2004, with broad money M2, which covers cash in circulation and all deposits, rising by an annualized 19.8 per cent, 1.3 percentage points faster than one year earlier.

The central bank raised reserve requirements for some commercial banks by half a percentage point late last month.

Before the move takes effect, expected on the 25th of this month, the bank announced an across-the-board rise in reserve requirements on Sunday, also by half a percentage point, for all financial institutions except credit co-operatives. The two rises take effect on the same day.

Although Sunday's announcement pushed up coupons yesterday on two bond issues by China Development Bank to two-year highs, money market participants said the hike had not disrupted liquidity at commercial banks in the same way that it did last year.

Many small commercial banks experienced liquidity difficulties after last year's hike, even after the central bank announced the move one month early.

"The impact on short-term funds is muted since banks are fully prepared this time," said a senior manager at a State-owned commercial bank.

The central bank said the hike will freeze an estimated 110 billion yuan (US$13.3 billion) in bank reserves, which could potentially create loans a few times larger due to a so-called "multiplier effect."

Analysts said it remains to be seen to what extent the reserve hikes can slow down loan growth and cool down investment in such sectors as steel, coal and cement, where signs of overheating have attracted the attention of policy makers.

Many local governments are eager to tap into the new round of economic growth, encouraging investment by dishing out favourable land and electricity use policies.

And private capital keeps flowing into fast-growing sectors as China lifts investment restrictions.