China: Excess Liquidity Curbed?

The Economic Times had the following story:

BEIJING: China’s central bank raised the amount of foreign currencies that lenders must keep as reserves, seeking to cool the world’s fastest-growing major economy.

Banks must keep 5% of their foreign-currency deposits as reserves starting May 15, up from 4%, according to a People’s Bank of China circular to lenders. The increase will remove about $1.7 billion from the economy. The decision will make less of the $165 billion of foreign-currency deposits as of March 31 available for lending and investment in the stock market, which surged to a record on Tuesday. It may also ease pressure for appreciation of the Chinese yuan, which has gained 7.5% since July 2005.

“The central bank probably wants to curb excess liquidity and indirectly ease the pressure on the yuan to rise,” said Guo Zhaoyang, a foreign-exchange analyst at China Everbright Bank in Guangzhou. “Too many people may have converted their foreign currencies blindly into the yuan.”

“The bigger news is what’s going on with the yuan, given they accelerated the pace of appreciation on Tuesday,” said Steve Rowles, an analyst with CFC Seymour in Hong Kong. “The story is inflation could be just coming into the China market and a stronger currency could help tackle that.”

Lots of thoughts on this, but I will let others comment.