China's central bank Governor Zhou Xiaochuan (
"We never rule out the possibility of using further measures to curb liquidity," the People's Bank of China head told reporters in Basel, Switzerland, yesterday during the bimonthly meeting of central bank governors from the Group of 10 nations.
The bank is assessing "which measure is appropriate for the current economic situation," he said.
On Friday, Zhou ordered banks to set aside 9.5 percent of deposits as reserves to prevent a rebound in lending and investment in factories and real estate.
The central bank has also raised interest rates, sold bank bills and allowed the Chinese currency to strengthen in an attempt to stop cash from record overseas sales overheating the world's fastest-growing economy.
"There is too much liquidity out there and interest rates may have to go up sooner or later," said Tao Dong, Credit Suisse's chief Asia economist, by phone from Hong Kong. "There may be one or two more rate hikes in the coming six months."
The central bank raised banks' required reserves by 0.5 percentage points in June, July, November and last week after leaving them unchanged for more than two years.
The People's Bank estimates every increase of that size reduces the amount available for lending by 150 billion yuan (US$19 billion).
China raised interest rates twice last year to reach 6.12 percent. The central bank on Nov. 14 warned growth in fixed-asset investment, which has cooled since June, could rebound.
The rise in reserve requirements is aimed at cooling the economy without adding pressure on the yuan to strengthen, a possible effect of another increase in interest rates. The US and Europe accuse China of keeping its currency undervalued to make its exports cheaper.
The yuan has risen 5.9 percent against the dollar since a decade-long link to the US currency was scrapped on July 21, 2005. The yuan weakened 0.11 percent to 7.8132 to the dollar as of 4:18pm in Shanghai yesterday.
"We need to monitor further data to observe the effectiveness of the measures taken," Zhou said yesterday. "There is a little bit too much liquidity in the market at the moment."
The nation's trade surplus probably swelled 74 percent to a record US$177.3 billion last year, according to the median estimate of a Bloomberg News survey of 16 economists. The nation's foreign-exchange reserves have reached US$1 trillion.
The central bank "has noticed talks among the intellectual circle about a possible government plan" to set up a separate vehicle to manage and invest reserves, Zhou said, without elaborating.
China is set to take "more concrete" measures this year to improve reserve management, Zhou told reporters on Sunday.
The world's largest holder of foreign-exchange reserves has "always been adjusting its investment strategy," he said.
Along with raising interest rates and reserve requirements, the People's Bank has stepped up so-called "open-market operations," selling bills to banks to soak up a net 770 billion yuan last year, according to data from the official securities newspaper.
"Various measures taken by the central bank since 2006 have achieved some results in slowing down lending growth in the past few months," the People's Bank said, announcing the increase in bank reserve requirements on Friday.
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