From: People’s Bank of China Website

China will raise the reserve requirement ratio by 0.5 percentage points for commercial banks from Aug. 15, the People’s Bank of China (PBOC) announced Monday.

“The move does not come as a surprise seeing as almost every economic index is overheating,” said Song Guoqing. a well-known economist with Beijing University.

“However, 0.5 percentage points is not large enough – it can’t even absorb the newly-added foreign exchange reserves,” Song added.

“China’s forex reserves go up by about 30 billion U.S. dollars a month while loans of commercial banks totaled 25 trillion yuan at the end of June,” Song explained, “which means that a 0.5 percentage points rise can only absorb 125 billion yuan a month.”

China’s gross domestic product (GDP) rose 11.5 percent in the first half of the year, after it grew 11.9 percent in the second quarter, while the country’s consumer price index (CPI) went up to a 28-month high of 4.4 percent in June and 3.2 percent in the first half.

This is the sixth time China has raised the reserve requirement ratio to curb China’s excess liquidity, following an interest rate hike announced last Friday in which China raised the one-year benchmark deposit and lending rates by 27 basis points to 3.33 percent and 6.84 percent respectively.

Meanwhile, the State Council, or cabinet, announced last Friday the reduction of tax on the interest on personal bank savings from 20 to five percent from Aug. 15.

“The measures just can’t catch up with the overshooting economy,” Song said, “so there will be more policies coming out.”

The central bank said the move was aimed at “strengthening management of liquidity in the banking system and rationalizing lending growth”.

PBOC statistics show that China’s foreign exchange reserve reached 1.33 trillion U.S. dollars at the end of June, up 41.6 percent on the same period last year.

A total of 266.3 billion U.S. dollars were added to the country’s foreign exchange reserve in the first half of 2007, 144 billion U.S. dollars more than a year ago, said the central bank.

The six-month rise is higher than the whole-year rise of 247.3 billion U.S. dollars in 2006.

Copyright Fund China 2009.

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