The required reserve ratio for financial institutions engaged in the deposit business will be raised by 0.5 percentage points as of April 16 to 10.5 percent, said sources with the People's Bank of China on Thursday.

This is the third time the central bank has raised the deposit reserve ratio this year.

The central bank raised the bank deposit reserve ratio by the same margin of 0.5 percentage points in June, August and November 2006 and again in January and February this year.

The move shows the central bank's determination to control liquidity.

In another move to curb excessive liquidity in China's banking system, the central bank raised one-year benchmark interest rates by 0.27 percentage points on March 18.

China's frequent use of retrenching monetary measures such as raising deposit reserve ratio shows the central bank is very alert to excessive liquidity and inflationary pressures, said Cai Zhizhou, deputy director of the China Center for National Accounting and Economic Growth of Peking University.

Chen Deming, deputy director with the National Development and Reform Commission (NDRC) said last week at a conference on economic system reform held in southwestern Chengdu city that excessive liquidity has been a major problem for the Chinese economy and the situation worsened in the first two months.

Central bank statistics show that RMB loans issued by China's financial institutions were up 1.2 percentage points in February on the January level and had risen a sharp 17.2 percent on a year ago.

According to data from the National Bureau of Statistics, the consumer price index (CPI) was up by 2.7 percent in February on a year ago.

The CPI has risen by more than two percent year on year since the beginning of the year.

China's overheating investment is spurred by strong incentives for domestic enterprises to borrow and banks to lend, said Cai Zhizhou.

Higher deposit reserve ratios are an effective means of retrenching capital held by banks, he said.

Excessive liquidity cannot be solved in the short term, said Su Yanzhu, a fund manager with China Southern Fund Management Co. Ltd.

The central bank said in a statement released Thursday that it will maintain its prudent monetary policies, tighten control over bank liquidity to maintain a proper liquidity level and prevent excessive growth in monetary credit.

Source: Xinhua