China's central bank announced a 0.5 percent hike in bank reserve ratio Wednesday in the latest move to cool down economy and curb inflation.

Lenders must park 15 percent of deposits with the People's Bank of China (PBOC) as reserves from January 25, up from 14.5 percent, the central bank said on its website. The ratio is the highest since 1984.

The PBOC said in a statement that the adjustment is to draw back excess liquidity at banks and curb the overly fast growth of credits.

The increase in the reserve requirement is the first such move in 2008, and the 11th since January last year.

Excess liquidity is a major challenge for the Chinese government as it could result in asset bubbles and economic overheating. China's benchmark Shanghai Composite Index almost doubled last year and the economy expanded 11.5 percent in the first three quarters.

The problem of excess liquidity becomes more prominent as the record trade surplus pumps more cash into the country.

China's foreign exchange reserve reached US$1.53 trillion at the end of 2007, up 43.3 percent from 2006, with US$461.9 billion added to the country's forex reserve in 2007,said the PBOC last week.

"The hike of the reserve requirement by only half a percentage point will have limited impact on the loans extension at the big four state-owned commercial banks, but have far bigger impact on that of the mid- and small-sized banks," said Yin Jianfeng, an expert with the Finance Research Institute of the Chinese Academy of Social Sciences.

China's renminbi-denominated loans increased 3.63 trillion yuan (US$501 billion) in 2007, 14 percent higher than in 2006. The PBOC has set the target for newly-added renminbi loans to be unchanged at 3.63 trillion yuan for the whole of 2008, China Securities Journal, a Xinhua-run newspaper, quoted an unnamed source as saying on Monday.

At the 2007 Central Economic Work Conference concluded on December 5, the government pledged to shift its monetary policy to "tight" from "prudent" to prevent economic overheating and evident inflation.

Apart from frequent open market operations, the central bank last year raised the reserve ratio 10 times and benchmark interest rates six times amid efforts to curb inflation and overheating economic growth.

Insiders said the PBOC would continue to raise the reserve requirement and conduct open market operations and window guidance to tighten liquidity and credit expansion, given the nation's high global trade surplus.

The government should take a prudent approach toward macro-economic controls, given the uncertainty in the country's economic growth this year with the US economy showing signs of recession, Yin added.

(China Daily January 17, 2008)