Shanghai Composite index falls 116 points on Reserve Rate Hike


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[B]Shanghai Composite index falls 116 points on Reserve Rate Hike [/B]
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This Friday the Shanghai Composite index fell 116.48 points to 5,277.18 after the [B]People?s Bank of China [/B]central bank raised the amount of reserves banks are required to hold. The performance of other Asian markets was mixed. In Hong Kong, the Hang Seng index was 67 points lower than yesterday to close at 23.982. In South Korea, the Kospi closed 0.21 percent lower at 1,884. On the other hand, in Singapore, the Straits Times index advanced 0.66 percent to close at 3,488 and in Taiwan, the Taiex, advanced 1 point to close at 9,018.

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[B]People?s Bank of China Raises the Reserve Requirement Ratio[/B]

Yesterday, we said that the People?s Bank of China is implementing a series of financial measures to strengthen macro-economic management and to maintain balanced monetary aggregates and today the PBOC surprised the markets by further tightening the Chinese financial system. The central bank said that “In order to strengthen liquidity management in the banking system and check the excessive growth of monetary credit, the People?s Bank of China has decided to raise the RMB reserve requirement ratio for depository financial institutions by 0.5 percentage points as of September 25, 2007”. Since the beginning of 2007, on six occasions the PBC increased the reserve requirement ratios of financial institutions by 3 percentage points and on three occasions it raised the benchmark interest rates on loans and deposits of financial institutions. Other financial instruments such as open market operations and reserve requirement policies were also employed to withdraw excess liquidity from the system.

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[B]The Chinese yuan closed at 7.5395 against the US dollar on speculation the People’s Bank of China (PBOC) will continue to increase interest rates to control inflation and remove excess liquidity. Moreover, Chinese Yuan 1 year non-deliverable-forwards traded at 7.1795 to the dollar, anticipating the yuan could be almost 5 percent stronger in one year’s time. [/B]