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July 30, 2007
China raises the required reserve ratio
In my macro courses, I point out that the required reserve ratio is seldom changed in the U.S. It is a blunt instrument for conducting monetary policy. In a stable and well-regulated monetary system, there really isn't much reason to touch it. However in systems marked by tremendous change and growth raising the reserve ratio can be an effective way to attempt to restrain the growth of credit and prevent inflation pressures. Hence, China has raised their required reserve ratio five times already this year.
Make that six. Effective August 15, the required reserve ratio for most large banks will be 12 percent, a half-percent increase. From China Daily:
The central government has vowed to prevent the economy from overheating; and the central bank said the hike in the reserve requirements was aimed at "strengthening management of liquidity in the banking system and control excessive growth in money supply and credit".
The broad measure of money supply, or M2, grew by 17.1 percent year on year in June, which was higher than the target of 16 percent set by the central bank for this year.
The latest step follows the raising of benchmark interest rates by 0.27 percentage point on July 20 and cutting the tax on interest income from 20 percent to 5 percent in a coordinated move to reduce liquidity and stabilize the blistering economy.
"The liquidity situation has become more and more serious," said Zhao Xijun, finance professor at Renmin University of China.
Indeed. The expectation is that the required reserve ratio will need to be increased even further just to keep up with the growth of liquidity resulting from their large trade surplus.
Posted by William Polley at July 30, 2007 11:45 PM
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