Reserve cut to free 396b yuan in bank system
Beijing's move to cut the amount of funds banks must hold in reserve is expected to unleash 396 billion yuan (HK$483.6 billion) into the financial system and improve the profitability of lenders.
The People's Bank of China said on Wednesday it would lower the so-called reserve requirement ratio by 50 basis points on Monday. After the cut, the ratio will be 21 per cent for large banks and 19 per cent for smaller ones.
The first reduction since December 2008 follows 12 increases in the past two years and signals further monetary easing down the road as the mainland grapples with an economic slowdown amid the worsening euro-zone debt crisis.
Mainland banks are expected to benefit from further reserve reductions next year with more funds available for lending, which would help boost investor sentiment in capital markets.
Bank shares rallied in Hong Kong yesterday, with Industrial and Commercial Bank of China rising 10.67 per cent, Bank of China 10.37 per cent, Agricultural Bank of China 8.97 per cent and China Construction Bank 5.7 per cent.
Banks also rose on the mainland markets, after being shunned for months because of their exposure to bad loans from local government financing vehicles, property developers and exporters.
'The cut would help increase the likelihood of a soft landing for China's economy, thus reducing non-performing loan pain in this economic adjustment process,' said May Yan, a Barclays Capital analyst.
The central government has been attempting to put the brakes on the economy since last year to ease runaway inflation. It introduced lending curbs on developers, raised interest rates and asked banks to set aside more money as reserves.
As a result, property prices started falling this year and small firms complain they are finding it difficult to obtain loans. Economic growth slowed to 9.1 per cent in the third quarter from 9.6 per cent in the first half.
'Banks have suffered low deposit growth due to competition from wealth management products as well as the central bank's widening of the base for calculating RRR by including margin deposits,' Yan said.
With the reserve reduction, banks with low loan-deposit ratios and good capital positions, such as ICBC and Construction Bank, would benefit and be able to increase loans faster than their rivals, she said.
Barclays expects three more reserve cuts by the middle of next year. Standard Chartered forecasts another reduction next month and a total of four cuts next year.
Citigroup analysts estimate every cut of 50 basis points would improve banks' profits by 0.5 per cent.
Lu Ting, an economist at Bank of America Merrill Lynch, said he did not expect interest rates to drop in the near future despite the cuts in reserve ratios. He expects loan growth next year to be about 14 per cent with new loans at 7.5 trillion to 8 trillion yuan.
New loans would not exceed the official target of 7.5 trillion yuan this year, the Shanghai Securities News reported yesterday, quoting unnamed sources. Banks extended 6.3 trillion yuan in new loans in the first 10 months of this year.