China's central bank raised its reserve requirements by half a percentage point to 12 percent, effective August 15. The hike is expected to absorb 180 billion yuan ($23.78 billion) of liquidity funds.

Experts have forecasted that the policy will weaken commercial banks' ability to utilize assets and control the money supply.

According to Guo Shikun, Head of Research at the China Construction Bank, the rise of the reserve requirement ratio will have a significant impact on the operation and development of commercial banks whose income mainly depends on the profit difference between deposits and loans.

Guo emphasizes the fact that trade surplus leads to the swelling of foreign exchange, and that in addition to making loans, China's commercial banks lack channels for capital allocation.

This is the sixth time this year that the central bank -- the People's Bank of China - has raised the deposit reserve ratio, with each rise being 0.5 percent. The central government said the aim was to strengthen management of liquidity in the banking system, and to restrain excessive growth in the credit money supply. The bank has raised its reserve requirements nine times since July 5 last year, increasing the deposit reserve ratio from 7.5 percent to 12 percent in the past 13 months.

Experts say that the country needs to readjust its industrial and foreign trade structure to resolve the issue of trade surplus and rationalize lending growth.

Wen Bin, an analyst at the Bank of China, believes that the latest move by the central bank is, on one hand, targeted at capital, and on the other, aimed at raising the interest rate of the monetary market.

"We may fail to see a satisfactory result," he says, "due to the fact that the interest rate of the currency market has experienced only a short-term rise, following the several hikes in the reserve deposit ratio. In addition, the liquidity is ample."

"The main role of this adjustment," says Wang Guogang, Deputy Head of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, "is to enable the Chinese economy to undergo steady development. The adjustment will produce some effective results for the country's economy."

On July 20, the central government raised benchmark interest rates by 0.27 percent, and cut the tax on interest income from 20 percent to 5 percent, only 10 days before this hike in reserve deposit ratio.

"Monetary policy should be influenced by accumulated policies," says Zuo Xiaolei, an economist of China Galaxy Securities Co. Ltd., "and these need to be adjusted slightly each time, thus resolving the issue of ample liquidity step by step. It is understandable that the central government is readjusting its policies frequently in the first half of the year."

"The hike in the reserve deposit ratio is a defensive policy, " argues Li Daokui, Director of the China and World Economy Research Center of Tsinghua University. "First, it will prevent the economy from overheating; second, it will stem inflation; and third, it sends warnings to the security market, given the fact that the stock market has been increasing to a record in the recent weeks."

He Fan, Deputy Director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, says that this slight adjustment will not have a great impact on the stock market, that the potential of a bull market needs to be released slowly and continuously. Therefore, he says, the constant slight adjustment is beneficial for the healthy development of the government.

Economist Gu Haibing of the People's University feels that the adjustment is designed to pin down the loan impulses of financial institutes, although he doesn't hold any hope for this policy. He points out that China is currently lacking in a suitable interest policy for the trend of macro-economy, and that although the benchmark interest rate was raised, the figure is too small to affect the current basically negative benchmark rates. The lever of interest rate should be used in macro economy, he says.

"Utilizing the interest rate level calls for interest rate to be marketable," he adds. "China should accelerate its financial reforms, establishing regular meeting systems to discuss the utilization of macro-economic policy, like interest rate policy. This way the central bank can more effectively adjust and control finance."

(Source: people.com.cn, jizhezhan.com, and chinanews.com)