Raise its reserve ratio requirement by percentage point

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Reference no: EM131112907

China’s central bank will raise its reserve ratio requirement by a percentage point to a record 17.5 per cent by June 25, stepping up a battle to contain lending growth...The increase will freeze up about 422 billion yuan of funds, equivalent to 91 per cent of the value of new yuan-denominated loans extended in April… The latest move adds to the 614.7 billion yuan removed from the financial system through reserve ratio increases since January. China’s banks had an average excess reserve deposit ratio of 2 per cent as of March 31, down from 3.3 per cent in December. The rate that banks charge each other for seven-day loan… rose to 4.93 per cent in Shanghai, the highest since January 24, according to China Bank Interbank market. The gain suggests banks are hoarding cash in anticipation of further reserve ratio requirement increases… Every half-point increase in the reserve ratio requirement cuts banks’ profit by as much as 1.5 per cent, assuming they reduce lending to comply with it, said Li Qing, an analyst at CSC Securities HK Ltd. Using this article, address the following items: • Conduct a comparison of the reserve ratios in China and the US. Identify what is different. • How does the reserve ratio influence China’s money multiplier? • Would a higher reserve ratio increase or decrease bank profit? Why or why not?

Reference no: EM131112907

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