The People's Bank of China said Wednesday that it will require some of the country's commercial lenders to raise their deposit ratio to ensure they have enough cash slated for covering bad loans.

The central bank stipulated that banks whose capital adequacy ratio is below 8 percent must increase the percentage of deposits held as reserves to 7.5 percent from the current 7 percent.

Reserve requirements are the amount of funds banks must hold in cash against deposits made by their customers. The money must be in the banks' vaults or at the central bank.

The adjustment will take effect on April 25, the People's Bank of China said in a statement yesterday.

The policy is seen as a wake-up call to domestic banks that don't have enough cash to cover their bad loans, analysts said.

China raised the reserve requirement for banks and other deposit-taking institutions by 1 percentage point to 7 percent last year. By jacking up the reserve requirements, about 150 billion yuan (US$18.07 billion) in bank reserves were frozen at that time, according to the central bank.

Among the country's commercial lenders, few are currently able to meet the 8 percent minimum capital adequacy ratio.

The statement should also serve to curb lending, analysts said.

The China Banking Regulatory Commission is seeking to restrain banks from rash lending to overheated industries such as real estate.

Bad loans at the country's state banks topped 2 trillion yuan, according to the banking watchdog.

Fearing an adjustment of reserve requirements before yesterday's announcement, commercial lenders had given the cold shoulder to the planned issuance of 60 billion yuan central bank notes this week.

The central bank notes are issued to rein in excessive liquidity in the money market, a move to ease the potential development of inflation in China, said industry watchers.

Only 39.6 billion yuan out of the 60 billion yuan worth of central bank notes were bought by commercial lenders this week, according to the PBOC.

"After the central bank further increased the reserve requirement, more of domestic commercial lenders' cash will be frozen, which will weaken their lending capability," said Han Zhenguo, an analyst with Haitong Securities. "It will lead to a higher average reserve requirement in the domestic banking industry, which will help cool down an overheated economy from excessive lending."

Separately, China encouraged the country's largest banks to seek share-listings in a move to boost their capital adequacy ratio.

The Bank of China and China Construction Bank, the country's second and third-largest lenders, were given six months to restructure themselves into companies that are eligible to list on domestic stock markets.

The two banks are required to draw up detailed plans to set up stock ownership companies by the end of September.

They have also been told to unveil their development plans by the end of April and to have their annual reports audited by external companies to meet international standards.

At the end of last year, the central government injected US$45 billion into the two banks to help them reorganize.

(Eastday.com March 25, 2004)