China raises reserve requirement for the 5th time

Written by || July 31 2007

The People’s Bank of China (PBOC) has hiked the reserve requirement by 50bps, to 12%, effective from August 15. The reserve requirement rate is now approaching the threshold of 13%, common back in 1988-98. This is the fifth time that the PBOC has tightened the reserve requirement policy this year, the last being a hike on July 20th.


However, the timing of today’s hike surprised the market. The PBOC often announces policy changes on Fridays, whereas this came on a Monday. The increased tightening indicates a few things:

  1. Loose liquidity conditions have not disappeared despite previous rate rises
  2. Concerns about overheating are real
  3. The tightening policy could be a forward-looking measure to stabilize growth in light of the Party Congress this Fall

Banks are predicting one more hike in reserve requirement and policy rates this year to curb excess liquidity. We believe this reserve change is still relatively conservative in size and will likely not to change the liquidity conditions dramatically in the near term. Further, continued tightening will likely force commercial banks to look for more profitable opportunities outside of their raditional lending business as listed PRC banks have reported above 50% profit growth in the first half of the year. This could be a good push in the right direction for local banks to re-look at their historical revenue streams and expand to a more balanced portfolio of products and services.

As we expect GDP growth of ~11% this year and in the future, more tightening policies could focus on the structural issues rather than growth itself. The pace of currency appreciation and consumption promotion may determine the longer-term growth path.