Monday, August 29, 2011

People's Bank of China Adjusts Reserve Requirement Rules

The People's Bank of China has been reported as broadening the base of reserves it requires lenders to deposit with the central bank; including "margin deposits" i.e. collateral deposited by customers for acceptances, letters of credit and letters of guarantee, as part of the calculations for required reserves.  The move has been seen as punishing fast expansion of liquidity in this area, and it is estimated it will drain as much as 900 billion yuan of liquidity from the banking system, and will be implemented from early September.  The move will have a similar effect to tightening the reserve requirement ratio (equivalent to about 100bps), indicating that China continues to hold a tight monetary policy stance.

On monetary policy China's Vice Premier, Wang Qishan, was recently quoted as saying China should "continue to carry out the prudent monetary policy and optimize the credit structure".  The People's Bank of China last increased the interest rate by 25 basis points to 6.56% in July this year.  The Bank also raised the reserve requirements by 50 basis points in June this year to 21.5%.  China reported inflation of 6.5% in July, up from 6.4% in June, and 5.5% in May, and above the government's target of 4%.


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