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"The central bank ``has noticed talks among the intellectual circle about a possible government plan'' to set up a separate vehicle to manage and invest reserves, Zhou said today, without elaborating.........................."
China May Further Reduce Cash in Economy, Zhou Says (Update2)
By Yanping Li
Jan. 8 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan said he is considering more steps to cool the world's fourth-biggest economy, after lifting bank reserve ratios four times in seven months.
``We never rule out the possibility of using further measures to curb liquidity,'' the People's Bank of China head told reporters in Basel, Switzerland, today during the bi- monthly meeting of central bank governors from the Group of 10 nations. The bank is assessing ``which measure is appropriate for the current economic situation.''
Zhou on Jan. 5 ordered banks to set aside 9.5 percent of deposits as reserves to prevent a rebound in lending and investment in factories and real estate. The central bank has also raised interest rates, sold bank bills and allowed the Chinese currency to strengthen to try to stop cash from record overseas sales overheating the world's fastest-growing economy.
``There is too much liquidity out there and interest rates may have to go up sooner or later,'' Tao Dong, Credit Suisse's chief Asia economist, said by phone in Hong Kong. ``There may be one or two more rate hikes in the coming six months.''
The central bank raised banks' required reserves by 0.5 percentage point in June, July, November and last week after leaving them unchanged for more than two years. The People's Bank estimates every increase of that size reduces the amount available for lending by 150 billion yuan ($19 billion).
Interest Rates
China raised interest rates twice last year to reach 6.12 percent. The central bank on Nov. 14 warned growth in fixed- asset investment, which has cooled since June, could rebound.
The latest rise in reserve requirements is aimed at cooling the economy without adding pressure on the yuan to strengthen, a possible effect of another increase in interest rates. The U.S. and Europe accuse China of keeping its currency undervalued to make its exports cheaper.
The yuan has risen 5.9 percent against the dollar since a decade-long link to the U.S. currency was scrapped on July 21, 2005. The yuan weakened 0.11 percent to 7.8132 per dollar as of 4:18 p.m. in Shanghai today.
``We need to monitor further data to observe the effectiveness of the measures taken,'' Zhou said today. ``There is a little bit too much liquidity in the market at the moment,'' he told reporters.
Swelling Surplus
The nation's trade surplus probably swelled 74 percent to a record $177.3 billion last year, according to the median estimate of a Bloomberg News survey of 16 economists. The nation's foreign-exchange reserves have reached $1 trillion.
The central bank ``has noticed talks among the intellectual circle about a possible government plan'' to set up a separate vehicle to manage and invest reserves, Zhou said today, without elaborating.
China is set to take ``more concrete'' measures this year to improve reserve management, Zhou told reporters yesterday. The world's largest foreign-exchange reserves holder has ``always been adjusting its investment strategy,'' he said.
Along with raising interest rates and reserve requirements, the People's Bank has stepped up so-called ``open-market operations,'' selling bills to banks to soak up a net 770 billion yuan in 2006, according to data from the official securities newspaper.
`Rising Pressure'
``Various measures taken by the central bank since 2006 have achieved some results in slowing down lending growth in the past few months,'' the People's Bank said, announcing the increase in bank reserve requirements on Jan. 5. ``However, there is a new increase of excessive liquidity in the banking system as a result of the continuing trade surplus and there is rising pressure for loans to increase.''
Still, ``too much attention'' has been paid to targeting money supply, when the ``final targets'' are inflation and stability, Zhou said in Basel.
China's broad money supply grew at 16.8 percent in November, slowing from a 17.1 percent expansion in October, the central bank's data shows.
The exchange rate will gradually play a ``more positive role'' in the country's economic overhaul and in adjusting the trade imbalance, state-run news agency Xinhua cited Zhou as saying last month. The bank will increase the yuan's flexibility and allow supply and demand to play a ``fundamental'' role in setting the exchange rate, he said.
``Maybe finally they are going to start loosening up gradually,'' said Wang Yuanhong, a senior analyst with the State Information Center, which is affiliated with the nation's top planner, the National Development and Reform Commission. He was speaking today in Beijing.
To contact the reporter on this story: Yanping Li in Basel on yli@bloomberg.net |
