Monday, December 13, 2010

China ex-c.banker favours raising banks' reserves over rates

SHANGHAI: China's central bank is using the right policy of boosting banks' required reserve ratios instead of raising official interest rates to soak up excess cash in the monetary system, a former deputy governor of the People's Bank of China said in remarks published on Monday, Dec 13.

Wu Xiaoling, who is now a senior lawmaker, said the PBOC's biggest task since 2003 had been mopping up excessive liquidity in the financial system.

On Friday, the central bank raised banks' required reserve ratios (RRR) -- the amount of money Chinese lenders must set aside and therefore cannot use for loans -- for a third time in a month, despite widespread market expectations of an interest rate hike.

China's inflation jumped to a 28-month high of 5.1 percent in November, the government announced on Saturday among a spate of robust data that strengthened the case for policy tightening.

Over the years, the central bank has bought most foreign currencies flowing into the country to keep China's currency yuan stable and thus injected a huge amount of yuan cash into the system, which needs to be sterilised.

Heavy foreign exchange flows in recent years have left commercial banks holding too much yuan, forcing the PBOC to use bill sales and bank reserve requirement ratios to sterilise it, Wu was quoted as saying.

On the other hand, if China's money market interest rates are too high while other countries' interest rates remain low, that will attract more speculative money inflows, Wu was quoted as telling a financial forum.

"As we are forced to passively inject so much base money into the system, we must use RRR hikes as the main means to take the money back while the potential for us to use interest rates as a tool is limited by low U.S. interest rates," Wu said. - Reuters


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