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2ND UPDATE: PBOC Tells Banks To Meet Reserve Hike In Dollars

By Denis McMahon

Of DOW JONES NEWSWIRES

SHANGHAI -(Dow Jones)- China's central bank has required its large domestic banks to set aside dollars rather than yuan to meet the last four hikes in their required reserves, people familiar with the matter told Dow Jones Newswires Monday.

By parking dollars with the central bank, commercial banks can help to slow China's pace of foreign-exchange reserve accumulation and ease appreciation pressure on the local currency.

An official at the central bank, the People's Bank of China, declined to comment. But, with trade surplus growth showing little sign of slowing, a tamer forex reserves expansion may help defuse some of the international criticism leveled against China for not doing more to resolve global economic imbalances.

It may also be an attempt by the PBOC to constrain yuan appreciation pressures by generating domestic demand for the U.S. unit, although such a move might be viewed unfavorably in the U.S., where policymakers have long angled for a sharper rise in the value of the yuan to smooth trade imbalances.

In its most recent monetary tightening move, the People's Bank of China said it would hike the reserve requirement ratio for banks by 100 basis points to 14.5%, the most aggressive increase this year, effective Dec 25.

What the PBOC didn't say is that large state-owned banks are required to use U.S. dollars to meet the entire increase. People familiar with the situation said Monday this was the fourth consecutive reserve increase the banks had to pay in dollars. On the previous three occasions, the rate was increased 50 basis points each time.

"By putting those dollars as a deposit at the central bank you will slow the reserve accumulation," said Morgan Stanley economist Wang Qing. "Although the dollars are still sitting on the central bank's balance sheet, it's treated as commercial banks' assets."

With China's trade surplus continuing to grow at a record pace, the central bank would otherwise have to buy those dollars in order to keep a lid on the yuan's pace of appreciation, thereby boosting its foreign exchange reserves.

According to Wang, the most recent hike will likely take about CNY350 billion out of circulation. With China's big five state-owned banks roughly accounting for three-quarters of all deposits in China's banking system, that would likely place about $36 billion in the PBOC's vaults. With hikes in October and November, that could result in China's commercial banks needing to set aside $72 billion for the quarter.

According to Logan Wright, Beijing-based China analyst for Stone & McCarthy Research Associates, who keeps track of China's reserve composition, based on the $72 billion figure, the foreign exchange reserves may increase by $50 billion less in the fourth quarter than in the third.

In the third quarter, reserves increased by $101 billion to $1.434 trillion at end of September. Beijing issues forex reserve data quarterly.

-By Denis McMahon, Dow Jones Newswires; 8621 6120-1200; denis.mcmahon@dowjones.com (Wang Ming and Wynne Wang also contributed to this story.)

(END) Dow Jones Newswires

December 17, 2007 07:38 ET (12:38 GMT)


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