The People's Bank of China, the nation's central bank, will raise commercial banks' reserve requirements from 7.0 percent to 7.5 percent beginning April 25. PBOC is tightening the screws on money supply and credit, issues that are posing challenges to healthy economic growth.

The People's Bank of China (PBOC) announced Sunday night that it will raise commercial banks' reserve requirements from 7.0 percent to 7.5 percent beginning April 25. The central bank is tightening the screws on money supply and credit, issues that are posing significant challenges to continued healthy economic growth.

The State Council, China's cabinet, has given its seal of approval to the move.

The new requirement will apply to the country's Big Four state-owned banks, 11 joint-stock banks and more than 100 urban and rural commercial banks. However, thousands of rural and urban credit cooperatives will maintain the existing six percent standard, according to the central bank.

Reserves are a percentage of total deposits that commercial banks must maintain for risk management. Only deposits over the minimum set by the central bank may be used for lending.

The higher reserve will freeze approximately 110 billion yuan (US$13.3 billion) in commercial banks' liquidity.

China's economy, the sixth largest in the world, is now facing such problems as continued swelling of investment demand, money and credit growth and mounting inflationary pressures.

The 0.5-percentage-point reserve hike is largely to prevent runaway growth of money and credit and keep the national economy expanding on a steady, fast and healthy track, PBOC announced. Too-fast credit growth could be accompanied by inflation, asset price bubbles, emergence of new non-performing loans at commercial banks and accumulation of financial risks.

The statement said financial institutions' reserves at the central bank now exceed 2 trillion yuan (US$241 billion).

The People's Bank of China vowed to maintain stable monetary policies while making "precautionary and minor"  adjustments to help the economy grow. China has set a 7 percent economic growth target for 2004, compared with 9.1 percent last year.

(Xinhua News Agency April 13, 2004)