China running out of room on required reserves -top banker

China has limited room to further increase lenders' required reserve ratio, which is already at a record high, a top bank executive said on Saturday.

China has raised required reserves eight times since early 2010, driving the level to 19.5 percent for big banks. The central bank pays an interest rate of less than 2 percent on required reserves, limiting earnings on about a fifth of banks' deposit base.

"I personally think there is not much room to further raise the reserve requirement ratio," Li Lihui, president of the Bank of China (3988.HK) (601988.SS), told reporters on the sidelines of the annual session of parliament.

"If some banks' asset-liabilities condition is not good enough and they are not lending in a prudent manner, the central bank can use differentiated reserve increases," he added.

The central bank has started reviewing lenders' balance sheets on a regular basis this year and has slapped punitive reserve requirements on those that have been particularly profligate in their issuance of credit.

Bank of China has faced no such additional reserve requirement so far this year, Li said.

Yi Gang, deputy governor of the central bank, told reporters that reserve requirement increases are a transparent and effective way to absorb excess cash from the market.

"We will use a basket of tools to tighten liquidity this year," Yi said on the sidelines of the parliament meeting.

China has raised interest rates three times since it began its monetary tightening in earnest in October. It has raised reserve requirements five times over that span.