While the required reserve ratio for financial institutions engaging in deposit business in China edged up by 0.5 percentage points to 10 percent on Sunday, analysts say further hikes are likely.

Chief economist Qu Hongbin with the HSBC (China) says China's central bank is using reserve ratio hikes to absorb liquidity. "This year we can expect three more reserve ratio hikes," he said.

The People's Bank of China has lifted the deposit reserve ratio five times since last July, with the latest move expected to take 176.5 billion yuan (about 23.22 billion U.S. dollars) out of the banking pool.

In a public statement, the central bank attributed the hikes to increasing currency liquidity which resulted from "unbalanced international payments generated by mounting trade surplus".

Official figures showed the country's outstanding renminbi-dominated loans amounted to 23.1 trillion yuan in January, up 16 percent year-on-year. The growth rate was 0.9 percentage points higher than the end of last year and up 2.2 percentage points from last January.

Meanwhile, China's trade surplus continues to surge, with the January figure climbing 67.3 percent year-on-year to 15.88 billion U.S. dollars.

Tang Min, deputy chief representative of the Asian Development Bank in China, says the central bank intends to use the moderate reserve ratio hikes as a warning against excessively rapid increases in loans and rebounding investment.

"The hike is expected and won't have many repercussions on the market, although further hikes will be possible," said Chief economist Zuo Xiaolei with the China Galaxy Securities.

To tighten money supply and curb inflation, China's deposit reserve ratios hovered around 13 percent from 1988 to 1998. The Bank of America predicts the ratio is likely to rise to 11.5 percent this year.

Economist Stephen Green with the Standard Chartered Bank said that the reserve ratio hike reduced the chances of immediate increase in interest rates following the Spring Festival. He predicts the central bank will raise its interest rate at lease once this year.

Ma Jun, an economist with the Deutsche Bank, stands by the bank's previous projections that interest rate will be raise twice to increase by 54 basis points this year.

He said the Deutsche Bank regards raising interest rate hikes as a proper tool to deal with the country's rising inflation and upsurge in investment.

Analysts also contend that financial institutes rather than individuals would be directly affected as a rising reserve ratio which forces the banks to set aside more of their deposits with the central bank and rein in their loans.

The country's stock markets and asset management businesses that service individual clients won't be greatly affected, they note.

Source: Xinhua