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China Raises Key Banking Benchmark

Daniel M. Harrison

The hike in the reserve ratio requirement, which is the amount of capital domestic banks are required to hold against liabilities, will take effect Nov. 26, said the People’s Bank of China. It's the ninth time Beijing has lifted the key benchmark this year.

"It’s not really a surprise," says Zuo Xiaolei, chief economist of Galaxy Securities in Beijing. "China has an excessive liquidity problem because there is a big imbalance in the money supply."

The last hike in the ratio took effect Oct. 25. On the same day, Beijing announced that GDP growth eased, and markets' saw their largest one-day fall in a three-month period, when the Shanghai Composite Index dropped 4.8%.

Even after market turbulence in the last two weeks, China’s Shanghai Composite Index has risen 190% year to date, closing Friday at 5315 points. Money managers in the region have expressed concern lately about the possibility of excessive loans in the domestic economy.

In addition, this week saw the Chinese currency rise to its highest level ever vs. the dollar: 7.46.

Economists forecast another potential rise in the reserve ratio requirement this year, and say that Saturday’s move sets the stage for an interest rate hike. The country's central bank has raised interest rates five times this year as it tries to rein in China's red-hot economy and stave off inflation.

"We don’t exactly know the time [when Beijing will raise rates], but we’re waiting next week sometime for statistics from national bureau come though," says Galaxy’s Zuo. "It’s also possible they continue to raise the reserve ratio this year if the liquidity problem is still in the system."

"China’s growth is 11.5% this year. I don’t think this will be enough to cool China’s inflation. Even just from the gross rate this is probably not enough,” she adds.