Chinese watchdog sounds capital warning

17 July 2008

Banks in China are likely to face a tougher time in repaying debt, due to new central bank-enforced capital ratio requirements.

This is the opinion of the China Banking Regulatory Commission (CBRC), which was reacting to the People's Bank of China's decision last month to raise the reserve ratio requirement (RRR) among banks to 17.5 per cent.

The liquidity demand was made in order to further safeguard banks' balance sheets against the continuing credit crunch, by making sure that they do not become financially overstretched.

However, the watchdog is also of the opinion that the People's Bank should not enforce a further rise, an anonymous source told Bloomberg.

His position is also backed up by some analysts, including Hong Kong based Sun Mingchun, who works for Lehman Brothers.

"While helping to control liquidity, further RRR hikes run the risk of repressing the financial system," the economist noted this week.

"Further hikes [could] do more harm than good," he added.

Mr Sun predicts a further 2.5 per cent rise in RRR over months to come, however.

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