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Saturday 11 October 2008
PBOC to Return Excess Reserves to Banks in Yuan not Dollars
The mainland’s central bank will give back commercial banks cash unlocked by the cut in the required reserve ratio in yuan instead of US dollars, banking sources said yesterday. PDF
PBOC to Return Excess Reserves to Banks in Yuan not Dollars
Jane Cai 11 October 2008
The mainland’s central bank will give back commercial banks cash unlocked by the cut in the required reserve ratio in yuan instead of US dollars, banking sources said yesterday.
Economists said the return in yuan meant it would not be necessary for the mainland to sell dollar-denominated assets worth about US$23 billion on international markets at a time when the deepening credit crunch meant the country’s selling, holding and buying of such assets could affect the financial stability of the United States.
In a globally co-ordinated effort to lift market sentiment, the People’s Bank of China announced on Wednesday that it would lower the reserve ratio - the level of capital banks must set aside as a proportion of deposits - by 0.5 percentage point, effective from October 15. The move is expected to release about 225 billion yuan (HK$257 billion) to the mainland’s lenders, based on the 45 trillion yuan in bank deposits at the end of August.
“Our bank has received a document from the PBOC saying that the money will be paid in yuan,” a source with one of the biggest lenders said.
PBOC officials said yesterday after the third-quarter monetary policy meeting that the mainland will learn from the crisis to improve banking regulation and supervision and maintain the stability of its financial system.
The country’s economy was moving in the desired direction and the financial system was safe and stable, the officials said, adding that “flexible and prudent” policies are needed amid an “unoptimistic international outlook”.
Since August last year, the central bank had been asking major lenders to meet increased reserve requirements in foreign currencies in a bid to slow the rise in the country’s official foreign reserves.
The PBOC invested the dollar-denominated required reserves, which showed up on its balance sheet as foreign assets but not as official reserves, economists said.
Ministry of Commerce researcher Mei Xinyu said that if the reserves were returned in US dollars, the mainland might need to sell dollar-denominated assets of US$23 billion, assuming an exchange rate of US$1 to 6.85 yuan and that 70 per cent of the reserves were paid in US dollars.
The mainland held US$1.81 trillion in foreign reserves at the end of June, official figures show, including US$922 billion in bonds issued by the US government and its government-sponsored enterprises. It is the second biggest US bond holder after Japan.
“I think the PBOC mainly considers its own needs. China still has a trade surplus, which means foreign currencies are continuing to flow in,” Mr Mei said.
“If the central bank returns in US dollars, more yuan will be needed to convert the currency under the administered foreign exchange system. Thus the currency expansion effects will be too strong. Too much currency in circulation harms efforts to curb inflation.”
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PBOC to Return Excess Reserves to Banks in Yuan not Dollars
Jane Cai
11 October 2008
The mainland’s central bank will give back commercial banks cash unlocked by the cut in the required reserve ratio in yuan instead of US dollars, banking sources said yesterday.
Economists said the return in yuan meant it would not be necessary for the mainland to sell dollar-denominated assets worth about US$23 billion on international markets at a time when the deepening credit crunch meant the country’s selling, holding and buying of such assets could affect the financial stability of the United States.
In a globally co-ordinated effort to lift market sentiment, the People’s Bank of China announced on Wednesday that it would lower the reserve ratio - the level of capital banks must set aside as a proportion of deposits - by 0.5 percentage point, effective from October 15. The move is expected to release about 225 billion yuan (HK$257 billion) to the mainland’s lenders, based on the 45 trillion yuan in bank deposits at the end of August.
“Our bank has received a document from the PBOC saying that the money will be paid in yuan,” a source with one of the biggest lenders said.
PBOC officials said yesterday after the third-quarter monetary policy meeting that the mainland will learn from the crisis to improve banking regulation and supervision and maintain the stability of its financial system.
The country’s economy was moving in the desired direction and the financial system was safe and stable, the officials said, adding that “flexible and prudent” policies are needed amid an “unoptimistic international outlook”.
Since August last year, the central bank had been asking major lenders to meet increased reserve requirements in foreign currencies in a bid to slow the rise in the country’s official foreign reserves.
The PBOC invested the dollar-denominated required reserves, which showed up on its balance sheet as foreign assets but not as official reserves, economists said.
Ministry of Commerce researcher Mei Xinyu said that if the reserves were returned in US dollars, the mainland might need to sell dollar-denominated assets of US$23 billion, assuming an exchange rate of US$1 to 6.85 yuan and that 70 per cent of the reserves were paid in US dollars.
The mainland held US$1.81 trillion in foreign reserves at the end of June, official figures show, including US$922 billion in bonds issued by the US government and its government-sponsored enterprises. It is the second biggest US bond holder after Japan.
“I think the PBOC mainly considers its own needs. China still has a trade surplus, which means foreign currencies are continuing to flow in,” Mr Mei said.
“If the central bank returns in US dollars, more yuan will be needed to convert the currency under the administered foreign exchange system. Thus the currency expansion effects will be too strong. Too much currency in circulation harms efforts to curb inflation.”
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