2014-07-10

China's Loan-To-Deposit Ratio Change Will Release Zero Yuan Into Economy

First up is coverage from the WSJ and SCMP from two weeks ago, when the rule change was announced.

China Regulator to Ease Rules on Banks' Loan-to-Deposit Ratio
Under current rules, Chinese banks must keep their loan-to-deposit ratios below 75%. For every dollar a bank collects in deposits, it can lend only 75 cents.

The China Banking Regulatory Commission said in a statement that it will hold to the 75% ratio but that it will adjust the way it is calculated to allow banks to lend more cash. Loans will be classified more strictly, and deposits defined more broadly, effectively making for a relaxation of lending conditions.

Analysts say the easing of rules will increase banks' appetite to lend and boost liquidity in financial markets, which could buck up the country's cooling economic growth.

But experts also voiced concern that such easing measures could set back the government's drive to make China's economy less reliant on debt financing.

"This is definitely good news for the economy," said Fan Zhang, a Shanghai-based economist with Malaysian bank CIMB. "But there is also a concern that it will take longer than expected to deleverage."

Move on loan-deposit ratio in China comes with risks
Beijing might be gearing up to ditch a rigid stalwart of command economy banking: loan-deposit ratios. Regulators took their first swing at the rules last week when they removed several types of loans from the equation used to calculate the ratio.

But ridding the banking system completely of the ratios might take longer than some hope.

Without delicate co-ordination with local government and state-owned enterprise reform, binning the ratios prematurely could be disastrous for banks without a taste for market forces.

The rules, which stop banks from lending more than 75 per cent of their deposits, have stiffened lenders for nearly 20 years.

Increasingly, for small banks, the regulation can mean coming up short on cash at the end of each quarter, when the regulator makes its rounds. In June last year, they played no small part in the cash squeeze that shook the market in Shanghai.

This is why some reform-minded officials have fixed their sights on the rules. The first move towards scrapping the ratios came last week, when the China Banking Regulatory Commission excluded relending facilities from the People's Bank of China, loans funded by non-puttable financial bonds with maturities of no less than one year, as well as a few other types of lending.

BNP Paribas expects the move to release 1.2 trillion yuan (HK$1.5 trillion) into the economy or to lower the overall loan-deposit ratio by 1.1 per cent. But more than anything, it is a signal for change in the market.

Here's a very long article in Chinese: 75%红线尚远 银行冷对存贷比解锁. The main takeaway: the average commercial bank lent out 65.9% of deposits at the end of Q1. The Agricultural Bank of China is at 60%. Banks have plenty of room to increase credit, rule change or no rule change, but they aren't increasing lending because they're worried about risk.

Long-term the rule change is important, but it isn't going to reverse the credit tightening that's underway.

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