Economist proposes a cut in banks' reserve requirements

Wang Songqi, vice director of the Institution of Finance and Banking of the Chinese Academy of Social Sciences, suggested to a recent forum that the central bank should lower the share of assets that commercial banks must deposit as reserves with the central bank to 6 or 7 percent, so as to provide more liquidity to the market.

Wang said that many companies are currently facing a cash squeeze. Considering that price control has a limited effect when the market interest rate is much higher than the official one, reducing the reserve requirements ratio will greatly help shore up confidence in the credit market by easing lending restrictions and allowing commercial banks to expand money supply.

Wang suggested the central bank take asset values into consideration and increase transparency when making monetary policy, be more active in policy adjustment, and provide forward-looking information for market players.