Banks may suffer liquidity problems
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The central bank raised the reserve requirement ratio (RRR) by half percentage point to a historic high – 20 percent for large lenders Friday, aimed to tame inflation by controlling lending growth.
Market analysts said yesterday that there could be more rate hikes in the pipeline and commercial banks might have liquidity problems if they are not prepared.
A 20 percent reserve requirement, a historic high, means that commercial banks have to lock up 20 yuan ($3) of each 100 yuan ($15) they receive from customer deposits. A hike of the reserve requirement means that commercial banks have less money available to lend.
Market analysts estimate that the half percentage point rate hike will freeze 360 billion yuan ($55 billion).
This is the third time that the central bank hiked the reserve requirement rate for this year and ninth time since January 2010. The new rate will apply starting March 25.
There is still a room for the central bank to readjust the reserve requirement ratio, finance.sina.com, a business news portal reported Saturday citing Wu Xiaoling, the former deputy governor of the central bank, speaking at a forum over the weekend.
A major cause of inflation is that China previously released too much money into the market, said Fan Gang, an economist and former central bank's monetary policy committee member, also speaking at the forum.
Following the government's stimulus package to boost the economy and the bank-lending spree, the overall money supply or M2 grew by 28 percent in 2009.
Currently the overall money amount indicated by the M2 is about 1.9 times China's GDP figures in 2010.
With tightening monetary policies such as interest rate and reserve requirement hikes, policymakers should be able to maintain inflation under 4 percent this year, Fan said.
The consumer price index, a gauge of inflation, surpassed the policymaker's preset 3 percent target last year.
But overly dependence on the reserve requirement could pose increasing risks to China's financial stability, Lu Ting,
China economist with Bank of America – Merrill Lynch, told the Global Times by e-mail yesterday.
"The PBOC cannot flexibly cut RRR when short-term liquidity is too tight," Lu stated.
The seven-day Shanghai inter-bank offered rate, an indicator of lender's liquidity, almost tripled after the previous announcement of a reserve requirement hike in January and February.
"If the commercial banks still place lending as priority without preparing for further rate hike, they will face great liquidity risks," Lu Zhengwei, senior economist with Industrial Bank, told the Global Times yesterday.
As result of the high-level reserve requirement and tightening liquidity, Lu warned that the inter-bank money market rate might spike again and be extremely volatile in the days to come.
Moreover, the up-tick in the reserve requirement doesn't exclude the possibility that the central bank will raise interest rates in the second quarter of this year, which will further drain liquidity, Lu said.
