04/30/2007, 00.00
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Inflation: China raises bank reserve ratio to 11 per cent

Move fails to convince everyone that inflation can be contained. Experts hope for higher interest rates. China’s banking system faces structural problems rooted in a high rate of unpaid loans.

Beijing (AsiaNews/Agencies) – In a new attempt to cool the economy China's central bank has raised the amount of money that commercial banks must hold in reserve, reducing the amount available for lending. The amount of reserves that lenders must keep with the central bank was raised to 11 per cent of their deposits, the People's Bank of China (PBOC) announced yesterday. The increase takes effect on May 15.

Bank lending on the mainland hit 1.4 trillion yuan in the first quarter of this—that represents nearly half of last year's total.

The increase in the reserve requirement ratio (the seventh since last June and the fourth time this year) was expected since the mainland's gross domestic product grew 11.1 per cent in the first three months of this year over the same period a year ago whilst inflation jumped by 3.3 per cent in March.

Bur for many experts the move falls short of what is needed. All in all, it would tie up an estimated 170 billion yuan in the banking system

Ha Jiming, chief economist of China International Capital Corporation, told the South China Morning Post that increasing the reserve ratio would have only a short-term effect and that an interest rate adjustment would be more effective.

“The excessively low interest rate is the root of excessive investment growth and dramatic asset price rises in China,” Mr Ha said.

In his view if the PBOC did not raise interest rates soon the stock market was likely to rise, increasing the speculative bubble.

Chinese firms are financed by banks at a rate of 98 per cent but often fail to pay back their loans.

Economist Weijian Shan noted that almost half of the banks assets are in unpaid credits. This means that almost half of all savings are lent to companies incapable of paying them back. In any other country these banks would have already gone under, but in China the state covers the losses using currency reserves.

In 2004 US$ 45 billion had to be used to save China’s second and third largest banks, the Bank of China and the China Construction Bank. Subsequently, another US$ 100 billion were used to save the Industrial and Commercial Bank of China and the Agricultural Bank of China.

According to Standard & Poor’s, a leading financial research and analysis company, it would take US$ 518 billions to put China’s banking system on a sound footing. That is 40 per cent of its GDP.

Chinese authorities are trying to contain inflationary pressures and prevent the speculative and real estate bubble from bursting because its effects would be devastating. However, their intervention so far has proven inadequate.

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