The required reserve ratio for financial institutes engaging in deposit business will be raised by 0.5 percentage points from Jan. 15, the People's Bank of China announced Friday.

The move showed the central bank's determination to continue implementing a stable money policy to tighten up the bank's liquidity management, experts said.

Astronomical foreign exchange reserve has made the central bank anxious about investment rebound, said Wang Xiaoguang, an economist with the National Development and Reform Commission.

Wang, supporting both the interest rate hike and reserve ratio rise for economy cool-down, expected the central bank to continue raising reserve ratio in the future.

The central bank lifted bank deposit reserve ratio three times by the same margin of 0.5 percentage points in 2006.

"A moderate increase of 0.5 percentage points shows that the central bank continues to finetune the market, instead of using drastic moves to consolidate the effects of macro-regulation," said Li Yongsen, a professor with the finance and securities institute under the People's University of China.

The three hikes last year helped take around 460 billion yuan out of the banking system.

Mao Yushi, another renowned economist in China, said it is more efficient to directly raise interest rate.

"The consecutive reserve ratio increases last year did not apparently alleviate the problem of excessive liquidity," he said.

Merely raising the reserve ratio is hard to sort out the excessive liquidity since it involves a series of complicated problems such as international balance of payment, said Zhao Peng, president of Anhui branch of the Industrial and Commercial Bank of China. The policy should be set in an all-around way, he added.

The rise of deposit and lending interest rates, however, will generate new pressure for a further appreciation of the Renminbi (RMB), and even lead to stock index slump, analysts said.

The government is worrying about the too-fast index climb in the stock market, said Tao Dong, an economist with Credit Suisse.

During the last week of 2006, the benchmark Shanghai Composite Index soared more than 10 percent.

Liquidity was extremely excessive in 2006 due to fast growth of trade surplus over the past two years.

By November 2006, the gap between bank deposits and loans reached 11 trillion yuan, trade surplus exceeded 150 billion U.S. dollars and state foreign exchange reserve topped one trillion U.S. dollars.

Excessive liquidity prompted banks to speed up lending, which in turn spurred investment and led to economic overheating last year.

The central bank thus strengthened its open market operations to withdraw liquidity and at the same time adopted retrenching measures such as raising interest rate, lifting required reserve rate and issuing central bank bills to keep liquidity growth within the controllable range.

As ample fluidity is expected to last, analysts said that the central bank will continue to strengthen fluidity control in 2007 by employing such tools as central bank bills and required reserve rate.

To reduce excessive fluidity, the central bank withdrew some 1.2 trillion yuan in 2006 through open market operations and upward adjustments of required reserve ratio.

The figure included about 771 billion yuan withdrawn through open market operations and 460 billion yuan frozen from three upward adjustments of required reserve rate totaling 1.5 percentage points.

Source: Xinhua