(Reuters)
Updated: 2007-04-06 15:56

A clerk counts renminbi banknotes at a China Construction Bank branch in Haian, Jiangsu Province in this file photo. China told banks Thursday to increase their reserves for the third time this year, cutting the amount of money available for lending in a new effort to cool an investment boom. [newsphoto]

China's short-term money rates, the yuan and the  equities edged higher Friday, with Chinese markets reacting calmly - as analysts and dealers had expected - to the latest hike in bank reserve requirements.

Thursday's late announcement of a 0.5 percentage point reserve ratio increase, to take effect on April 16, came several weeks earlier than many in the markets had anticipated but was by no means a big surprise.

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"It's earlier than expected, but it's still a continuation of the central bank's stated monetary policy," said senior analyst Fang Ming at Bank of China in a research report on Friday.

The central bank's impatience implies that China's March trade surplus, credit, investment and consumer price data might all remain at high levels, Fang said, adding that inflation could be near 3 percent, up from 2.4 percent in the first two months of the year.

Official figures for March will be announced in mid-April.

The central bank has raised the reserve requirement six times since last June, while official interest rates were increased twice during that period.

Goldman Sachs economist Hong Liang said, however, that the effects of the bank reserve hike would be short-lived.

"We do not expect it to have much impact on the real economy or the financial markets," Liang said in a research note.

"We reiterate our view that an interest rate adjustment would be a more credible tightening measure given the strong incentive and repaired capability of commercial banks to lend," she said.

On Friday, the yuan hit 7.7236 to the dollar in early trade, its strongest level since Beijing revalued the currency and depegged it from the dollar in July 2005. The previous high was 7.7240, set on Thursday.

It was trading at 7.7245 to the dollar at 0445 GMT, little changed from 7.7243 at Thursday's close.

LIMITED IMPACT

"Banks will be preparing money for extra reserves," said a Shanghai dealer at a European bank. "But the hike's long-term impact on the yuan's exchange rate will be limited."

Before the start of trading, the central bank had set the yuan's mid-point at a post-revaluation high of 7.7251, up from Thursday's mid-point of 7.7268.

Dealers said both the central bank and the market appeared willing to see the yuan rise a bit faster following a slowdown in appreciation over the past two months.

The yuan had risen only 0.4 percent since early February, translating into an annual pace of about 2.5 percent, compared with 3.4 percent last year.

The yuan is now set to break through the psychologically important 7.7200 mark later on Friday or next week, dealers said.

The money market was relatively calm with bill and short-term bond yields rising only 2 or 3 basis points, while longer-end bonds were steady, traders said.

But in response to an upcoming drain of funds from the market and the approach of a major initial public offering of equity, the weighted average seven-day repo rate rose to 2.1832 percent around midday from 1.9908 percent on Thursday.

Traders believe the repo rate may temporarily rise above 3.0 percent around April 19, when China CITIC Bank Corp.'s IPO -- expected to raise about $1 billion in Shanghai -- takes retail subscriptions, which could total several hundred billion yuan.

The benchmark Shanghai composite index, which climbed to an all-time high close of 3,319.140 points on Thursday, hit a fresh high of 3,323.59 after falling as much as 1.36 percent just after the open.

Some traders had expected the index to fall as much as 3 percent in intraday trading.

"The reserve ratio rise is clearly having an even smaller impact than we expected," said Zhou Lefeng, analyst at Xiangcai Securities, who expected the index to consolidate around 3,300 in the short term.

Analysts forecast that the index could still hit 3,500 in the coming weeks, aided by buying of blue-chips in anticipation of China's launch of stock index futures in the first half of this year.