THE government raised commercial banks’ reserve requirements Friday for the third time in five months to soak up more of the money gushing into the banking system from the country’s huge balance-of-payments surplus.

The People’s Bank of China (PBOC) said on its Web site that it is increasing the proportion of deposits that banks must hold in reserve at the central bank by 0.5 percentage points, effective from Nov. 15.

“Although the problem of excessive liquidity has been alleviated somewhat, China still faces a striking surplus in its international payments. Fresh excessive liquidity is still being generated,” the central bank said in a statement.

The increase takes the standard reserve requirement to 9.0 percent for big State lenders and joint-stock banks and to 9.5 percent for smaller institutions.

The central bank announced similar increases June 16 and July 21. Each half-point rise forces banks to tie up some 150 billion yuan (US$19 billion) that they could otherwise lend out.

The PBOC has also increased interest rates twice since late April to tackle rapid credit growth and slow an economy that is on track to log double-digit growth in 2006 for the fourth year in a row.

“For me it’s a signal that the bank is really trying to do something about the ample liquidity in the system. It’s a positive signal that they are trying to do something to tackle the overheating risk,” said Oliver Stoenner, asset allocation strategist at Cominvest in Frankfurt.

Market reaction was muted, not least because most China-watchers had expected the increase.

China has a balance-of-payments surplus of about 10 percent of gross domestic product, generated principally by a fast-growing trade surplus. This is on track to exceed US$140 billion in 2006, up from US$102 billion in 2005, when it tripled.

The central bank, in order to hold down the yuan, buys most of the dollars that flow into China from the surplus.

The PBOC issues huge volumes of bills to sterilize, or absorb, the yuan it issues in exchange for the dollars it buys.

Economists say the central bank has done a fairly good job with these sterilization operations, but most had forecast that another increase in reserve requirements would be necessary to prevent the torrent of cash from pumping up the money supply.

Because big banks already hold more reserves than they need to, Jun Ma with Deutsche Bank in Hong Kong said the impact of the latest increase would be insignificant.

“It will not cause a slowdown in loan growth and shall only prevent acceleration in loan growth,” Ma said. (SD-Agencies)