By Chris Oliver, MarketWatch
HONG KONG (MarketWatch) — Efforts by China’s central bank to take a more activist role in setting the amount of reserves individual banks must set aside could displace the role of market forces and even compound risks within the banking system, a Hong Kong-based analyst said Wednesday.
The People’s Bank of China plans to set lenders’ reserve requirements monthly on a bank-by-bank basis, and could also adjust the interest it pays for those reserves, according to a report Wednesday in the state-run China Securities Journal. See report on China’s reported bank-reserves plan.
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Dong Tao, chief economist for Asia ex-Japan at Credit Suisse, said the plan purportedly under study by the central bank would essentially see it play a huge role in assessing the financial health of individual banks.
“The central bank is playing the role of god, judging which bank is lending out too much and which deserves a higher reserve ratio, instead of leaving this to the market,” Tao said.
Tao said China’s interbank lending market is not as developed as comparable systems in the West and lacks the ability to discipline banks that take on excessive risk.
Still, he added, the new approach required the People’s Bank of China to make perhaps too many discretionary judgments on how banks should lend.
“And the more they do this, the more likely that at some stage some policy mistakes take place,” Tao said.
Tao said the central bank’s policy, though yet to be officially confirmed, amounted to a change in the banking infrastructure rather than a signal it is about to embark on an new round of monetary-policy tightening.
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