China's central bank has announced a one percentage point hike in the required reserve ratio for foreign currency deposits in another moderate measure to tighten credit and cool the economy.

Effective on September 15, the new policy demands banks keep 4 percent of their foreign currency deposits as reserves at the central bank, a rise from the 3 percent imposed less than two years ago, the People's Bank of China said in its latest statement. 
The move is to "further implement the prudent monetary policy and strengthen macro-control on foreign currency loan growth," it said.

Analysts say the move is expected to have a much milder effect on cooling an investment-driven economy, which expanded at a blistering rate of 11.3 percent in the second quarter of the year, than the 0.5 percent rise of local currency reserve ratio announced earlier this year.

Analysts predict the measure will only drain an additional US$1.6 billion out of the banking system. Foreign currency deposits at banks in China stood at US$161 billion at the end of June, according to central bank figures.

Local currency loans increased by 2.2 trillion yuan (US$275 billion), while new foreign currency loans reached US$ 7.5 billion in the year's first-half.

The banking measures are aimed at preventing financial problems caused by excessive credit growth and ensure a healthy economic expansion.

(Xinhua News Agency August 31, 2006)