Involuntary Excess Reserves, the Reserve Requirements and Credit Rationing in China

Using a sample of 95 banks that covers the period 2000–2011, this article examines Chinese banks’ credit lending behaviour in response to the changes in the reserve requirement ratio in the presence of involuntary excess reserves (IERs) in the banking system. The study finds that Chinese banks with positive IERs one period after a reserve requirement shock experience a significantly increased credit supply in response to an increase in reserve requirement ratio. However, the reserve requirements have no significant impact on the credit supply in Chinese banks that have negative IERs one period after a reserve requirement shock. This article sheds lights on the effectiveness of Chinese monetary policy, which uses reserve requirements as the primary tool to sterilize excess liquidity and restrain credit expansion.