PBOC ponders bank reserves

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Last updated at: (Beijing Time) Tuesday, March 09, 2004

PBOC ponders bank reserves

China is considering to differentiate the reserve requirement for its commercial banks as an attempt to restrain their lending capability amid the over-heating economy.

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China is considering to differentiate the reserve requirement for its commercial banks as an attempt to restrain their lending capability amid the over-heating economy.

The People's Bank of China is in discussions to launch a new set of reserve requirements for mainland banks to support a healthy macro-economic development, said Zhou Xiaochuan, Chinese central bank governor.

The chief monetary regulator said that by diversifying the reserve requirement, banks with better asset quality and less operation risk can expand quicker, while other lenders would slow down their expansions.

"It is most likely that the central bank will hike the reserve requirement for state-owned commercial lenders while maintaining the ratio for joint-stock banks," said Han Zhenguo, a Haitong Securities analyst.

"It will lead to an averaged higher reserve requirement in the domestic banking industry, which will help cool an over-heated economy from excessive lending."

The outstanding value of lendings stood at 17 trillion yuan (US$2.05 trillion) in Chinese financial institutions at the end of last year, an increase of 3 trillion yuan from the beginning of the year, according to the PBOC.

The gain was 1.1 trillion yuan more than in 2002.

China raised the reserve requirement for banks and other deposit-taking institutions by 1 to 7 percent last year.

Reserve requirements regard the amount of funds banks must hold in reserve against deposits made by their customers. The money must be in the banks' vaults or at the central bank.

In increasing the requirement, about 150 billion yuan in reserves has been frozen, the central bank said.

Meanwhile, Han of Haitong Securities said that an increased reserve requirement will not weaken the big-four state-owned commercial banks' financial strength as "they are currently sufficient in capital while the quality of their assets need to be improved."

The big-four, including the Industrial and Commercial Bank of China, Bank of China, China Construction Bank and the Agricultural Bank of China, occupy around 70 percent of the lending market.

"Their expansion should slow as risks always come together with bulging businesses," Han said.

The four lenders carried an average nonperforming loan ratio of 20.36 percent at the end of last year, compared with 7.92 percent in joint-stock commercial banks in China's mainland, according to the China Banking Regulatory Commission.

Local analysts said that tightening monetary policies, such as increasing the reserve requirement, is a substitute method to hiking interest rates to ease inflation.

China's consumer prices index rose by 3.2 percent in January, the fastest pace in more than six years, which has aroused fear of inflation in the fast-growing economy. Currently, China pays interest on bank capital frozen in reserve while many foreign countries do not pay such interests

Source:Xinhua

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