YUAN UNDER 8.00-- China moves to fend off economic overheating
(So the Yuan should be off to the races on a quick 12-15% appreciation over the next 6-8 weeks)....JJP
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China moves to fend off economic overheating
Friday, June 16, 2006 10:19:00 AM (GMT-06:00)
Provided by: Reuters News
(Adds refererence to China's foreign direct investment)
By Kevin Yao and Eadie Chen
BEIJING, June 16 (Reuters) - China on Friday moved to curb the rapid credit growth that its leaders fear could cause the red-hot economy to overheat, as the central bank imposed new limits on the amount of money commercial banks can lend.
It raised the proportion of money banks must keep in their reserves by half a percentage point, effective July 5.
The move follows a 27 basis-point hike in benchmark lending rates in late April and a revaluation of the yuan by .1 percent against the dollar in July last year.
It came just days after China's State Council, or cabinet, called for moves to cool the economy, whose main problems it listed as "excessive growth in fixed asset investment, runaway credit growth and especially structural imbalances".
Some analysts said the central bank move could be effective in curbing the destabilising credit boom.
Ben Simpfendorfer, a Hong Kong-based strategist for Royal Bank of Scotland, said it raised the costs for banks seeking funds, which they would have to pass on to borrowers.
"All they are doing is hiking the administered rate at which banks could lend but they're not affecting or tightening the base cost of funding itself," Simpfendorfer said.
"This will have far more impact than the late April rate rise," he said.
The last time the central bank raised reserve requirements for banks, in April 2004, it led to a surprising tightening of liquidity and higher money market rates, he said.
But Hong Liang with Goldman Sachs in Hong Kong said the effectiveness of such an adjustment would likely be eroded quickly by continued inflows of foreign exchange, driven by the undervalued currency.
"The excess reserve ratio stood at 3 percent at the end of March, and therefore, the 50 basis-point increase is not binding on the banks' capability to lend," she said.
For now, the central bank was likely to rely on tools such as open market operations and the issuance of special bills to help mop up excess liquidity, but could allow the yuan to appreciate more rapidly as the year went on, analysts said.
The yuan <CNY=CFXS> hit 7.9970 to the dollar on Friday, its highest level since last July's revaluation. Further appreciation could dampen exports and make monetary policy easier to manage.
'TOO FAST'
"Money supply and credit growth are too fast. And also the trade surplus is widening. The increase in bank reserve requirements by 0.5 percentage point is aimed at curbing this rapid growth," the central bank said in announcing the move on its Web site (www.pbc.gov.cn).
The bank reserve requirement before the move was 7.5 percent for big state banks and joint-stock banks and 8 percent for smaller banks, including urban credit cooperatives. Rural cooperative banks and credit cooperatives were exempted from the increase.
The central bank the move would tie up an additional 150 billion yuan, and would help fend off inflation, which might rebound if money supply were not kept in check.
China attracted $60.33 billion in foreign direct investment last year, some three times the roughly $19 billion that the tighter reserve requirements will extract from the system.
The bank said it would continue to carry out open-market operations on an appropriate scale to keep liquidity growth at a reasonable level.
Economists had expected the bank to raise reserve requirements or interest rates, given strong economic data in recent months that have shown investment and credit accelerating, but not so quickly.
"Most economists expected further tightening measures to come from the beginning of the third quarter but I think the decision is right and this is better," said Cheng Manjiang, China economist with Bank of China International in Beijing.
($1=7.997 Yuan)
(Additional reporting by Tamora Vidaillet and Jason Subler)
((Editing by Gerrard Raven; Reuters Messaging: brian.rhoads.reuters.com@reuters.net; +86 10 6598-1206))
Keywords: ECONOMY CHINA REQUIREMENT
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