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Banks required to hold more foreign currency reserves

(Shenzhen Daily)
Updated: 2007-05-09 14:22

The central bank raised the amount of foreign currencies that lenders must keep as reserves, seeking to cool the world's fastest-growing major economy.

Banks must keep 5 percent of their foreign-currency deposits as reserves starting yesterday, up from four percent, according to a People's Bank of China circular to lenders. The increase will remove about US$1.7 billion from the economy.

The decision will make less of the US$165 billion of foreign-currency deposits as of March 31 available for lending and investment in the stock market, which surged to a record yesterday. It may also ease pressure for appreciation of the Chinese yuan, which has gained 7.5 percent since July, 2005.

"The central bank probably wants to curb excess liquidity and indirectly ease the pressure on the yuan to rise," said Guo Zhaoyang, a foreign-exchange analyst at China Everbright Bank in Guangzhou. "Too many people may have converted their foreign currencies blindly into the yuan."

China's currency reserves surged by a record US$136 billion in the first quarter to US$1.2 trillion, partly as banks converted proceeds of overseas initial public offerings (IPOs) into yuan. There was a "rush" to bring home cash after Chinese companies raised nearly US$60 billion from IPOs last year, twice as much as in 2005, HSBC Holdings PLC wrote in an April 18 report.

The People's Bank of China, the central bank, said it hadn't issued a public statement concerning a change in reserve requirements. The circular came after the central bank on April 29 raised banks' local currency reserve requirement ratio for the seventh time in 11 months.

The benchmark Hushen 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, rose 3.6 percent to close at a record 3686.03.

The yuan closed above 7.70 for the first time since the end of a fixed exchange rate to the US dollar in July 2005. The currency gained 0.1 percent to 7.6960 against the US dollar at 5:30pm, according to the China Foreign Exchange Trade System.

"The bigger news is what's going on with the yuan, given they accelerated the pace of appreciation today (Tuesday)," said Steve Rowles, an analyst with CFC Seymour Ltd in Hong Kong. "The story is inflation could be just coming into the China market and a stronger currency could help tackle that."

Rowles said the figure may also suggest data due out in coming days will be stronger than economists expect, pointing to "overheating."