Monday, 26 February 2007

China's central bank increases reserve ratio

In ECON101 undergraduate economics the creation of credit by finanical instutions depends on the reserve ratio that the central bank. A lowering of the reserve ratio (which is what has happened in the UK and generally in the West in recent years) means that banks are able to lend more money hence increasing the money supply.

Today's news shows that the Chinese government may becoming worried about the overheating economy (whether this is via share prices, real estate prices etc.)

Central bank increases reserve ratio
The People's Bank of China (PBOC) has raised its reserve ratio for financial institutions engaged in deposit business by 0.5% to 10% to absorb liquidity, state media reported. Analysts project ratio hikes to rise as high as 11.5% in 2007. The PBOC has increased the reserve ratio five times since July 2006, with the latest move expected to take US$23.22 billion out of the banking pool. In a public statement, the PBOC attributed the hikes to rising currency liquidity caused by "unbalanced international payments generated by mounting trade surplus".

It will be interesting to see whether the ratio is tightened again. This is a policy rarely used by the West.

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