Sunday, May 6, 2007

Zhou Says China Has Room to Raise Reserve Requirements Further

People's Bank of China Governor Zhou Xiaochuan said there's room to raise commercial banks' reserve requirements further after seven increases in 11 months failed to slow lending and inflation.

``There surely is still room'' to raise the reserve requirements, Zhou said in an interview on a flight from Beijing to Frankfurt yesterday. Zhou, on his way to a meeting at the Bank for International Settlements in Basel, Switzerland, also said an acceleration in inflation to the fastest pace in two years is ``normal'' and ``not very unexpected.''

Premier Wen Jiabao is trying to prevent excess cash from a record trade surplus from stoking inflation, fueling wasteful investment and creating more bad loans. Economic growth accelerated to 11.1 percent in the first quarter from 10.4 percent in the previous three months, driven by a trade surplus that almost doubled to $46.4 billion.

Zhou has raised interest rates three times since April last year and sold bills to soak up liquidity in the banking system and stem price increases. Still, inflation accelerated to 3.3 percent in March, the highest rate in more than two years, and banks made 1.4 trillion yuan ($180 billion) of new loans in the first quarter alone, nearly half the total for last year.

``The recent acceleration in inflation is normal'' because prices of primary goods have increased substantially and labor costs have risen, Zhou said. ``We can't say there is no inflationary pressure, but it was not very unexpected.''

Zhou admitted that the psychological impact of reserve- ratio increases on the market is weakening. ``A weaker psychological impact can actually be a good thing,'' he said. ``People no longer have to feel so nervous.''

Each 0.5 percentage point increase in the reserve requirement removes about 170 billion yuan from the financial system. ``The quantitative effect is fixed,'' Zhou said. ``And this is objective.''

Local-currency deposits stood at 35.42 trillion yuan at March 31. Foreign exchange reserves, the world's largest, grew 37 percent from a year earlier, the fastest pace since November 2005.

While China isn't pursuing ``rapid'' growth in currency reserves, the economic adjustments that can slow the pace of growth ``take time,'' Zhou said.

The reserves grew by $1 million a minute in the first quarter, double the previous year's pace, on the export boom, foreign-currency swaps, and companies bringing home the proceeds of initial public offerings.

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