The effect of increased bank deposits ration with Chinese Central Bank Essay

The effect of increased bank deposits ration with Chinese Central Bank - Essay Example The effect of increased bank deposits ration with Chinese Central Bank If Chinese banks make more deposits with the central, the level of their total assets increase by the amount of deposits made to the central bank. Consequently, the central bank’s liabilities increase by the same amount of banks deposits. In most cases, the move will ensure that excess reserves within the banking system are reduced. In fact, banks will have to reduce their lending to households and firms by an equivalent amount deposited with the central bank. This policy measure could be realized if the central bank opts to sell bonds to banks from its portfolio to reduce excess reserves. For instance, the central bank might sell government bonds from available portfolios and the bonds could in turn be purchased by Chinese commercial banks. When banks make bonds payments by depositing an equivalent amount in reserves to the central bank, banks liabilities will increase by the amount of deposits made to the central whereas assets will increase by the amount of interest bearing bonds. However, the central bank’s assets will increase by the amount of deposits made while the assets will reduce by an equivalent amount of bonds issued. There are also numerous economic impacts ensuing from the decision made by People’s Central Bank. The effects are apparently depicted on the economic equilibrium (GDP) and expenses incurred. Indeed, the People’s Central Bank decision announcement that banks needs to hold extra deposits with China’s central bank causes considerable economic impact.