Pay attention to bank reserve ratio hike
According to a source, the banking regulators have told policymakers that forcing banks to increase reserves has hurt the industry’s ability to repay debt.
Last month, to rein in loan growth and inflation, the People’s Bank of China raised its reserve ratio requirement to a record 17.5 percent. The source also said that the China Banking Regulatory Commission has warned against ordering further increase.
The slowest growth in more than two years was resulted from China’s push to remove funds from the banking system last month. This leads to the risk that the minimum requirement for short-term financial strength, the source said.
Sun Mingchun, a Hong Kong-based economist at Lehman Brothers Holdings Inc, wrote in a July 15 note to clients, “When it helps to control liquidity, further reserve requirement ratio hikes run the risk of repressing the financial system.” China may be approaching “the limit where further hikes do more harm than good”, he added.
CBRC sent its recommendations to the State Council, the source said. Citing the legislature’s Financial and Economic Affairs Committee, the State radio said that the nation needed a “tight” monetary policy on Tuesday.
The reserve ratio requirement has been hiked up by 3 percent this year. The central bank froze up an estimated 1.3 trillion yuan of bank funds. This has made interest rates stable after six increases last year.
Lehman’s Sun forecast the reserve ratio will be boosted by another 2.5 percentage points in 2008.
The source said, “The number of Chinese banking institutions whose liquidity ratio, a measure of ability to meet short-term funding needs, had fallen below the 25 percent regulatory minimum increased by 85 to 392 in the five months to May 31.
According to Sun, the so-called excess reserve ratio dropped to 1.95 percent in June, the lowest since at least 2001, indicating the strain on banks’ finances. The ratio was the share of bank deposits that lenders voluntarily lodge with the central bank in addition to required reserves.
Additionally, as economic demand is weakening in US and Europe, China’s economic expansion is cooling. The statistics bureau said, “GDP rose 10.1 percent in the second quarter, the slowest since 2005.”
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