• Thu
  • Dec 25, 2014
  • Updated: 3:52pm
BusinessBanking & Finance

Mainland China banking regulator to ease loan-to-deposit ratio

PUBLISHED : Tuesday, 01 July, 2014, 4:05am
UPDATED : Tuesday, 01 July, 2014, 6:44am

The mainland's banking regulator will relax how it calculates its loan-deposit ratio, tiptoeing around more arduous changes to the banking law while delivering a light boost to the economy.

Starting tomorrow, the China Banking Regulatory Commission will remove three types of loans from the regulation's scrutiny, including funds lent under the central bank's relending facility to support small enterprise and commercial bank loans from international financial institutions or foreign governments, the regulator said on its website.

The ratio limits outstanding loans to no more than 75 per cent of their deposits. A change in the regulation was expected, analysts said. In recent weeks, officials at CBRC have noted the positive impact a small adjustment to the law could have.

"This has been well accepted and well predicted by the market," said Lu Ting, the head of China research at Bank of America Merrill Lynch. "The impact will be quite small."

The move is not an official change to the law, which would require approval from as high as the Standing Committee of the National People's Congress.

"It's interesting because they are doing their best to make changes without actually changing the bank law," Lu said.

The ratio floats at an average of 65 per cent, according to Nomura.

"The move is important because the regulation has been a hard, binding constraint for the banks for a long time," said Hao Zhou, a Shanghai-based China economist at ANZ. "It's very clear that the government is sending out a policy signal."

It is also an attempt to release more cash into the economy and boost economic growth towards Beijing's target of 7.5 per cent annual economic growth.


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Isn’t the Agricultural Bank of China supposed to help China’s farmers and farming industries ?
‘Being one of the major integrated financial service providers in China, the Bank is committed to catering to the needs of “San Nong” (three rural issues: agriculture, rural areas, and farmers) and capitalizing on the synergy between the Urban Areas and the County Areas.’
As for the small and micro enterprises (SMiEs), if it is really profitable for China’s banks to lend money to them, the banks wouldn’t have needed the government’s recent policies of targeted RRR cuts and relaxation of the loan-to-deposit ratio to encourage them to do so.
This is partly shown by the present average loan-to-deposit ratio of 65%, which is less than the upper limit of 75%.
From the point of view of the banks, there must be something wrong with the loans given to the SMiEs, just like there must be something undesirable about the shares of those listed companies whose PE ratios are too low.
Usually the SMiEs can present no mortgages or guarantees to the banks, and it’s much more risky to give loans to them because of their relatively high level of bad loans.
While it’s okay to lose money as a result of having lent money to the SOEs, those bank managers may lose their jobs if the loan applicants are the risky SMiEs.
In effect, China's banking authority is asking the profitable banks (or rather, their shareholders) to subsidize those risky SMiEs.
It's a bit like asking a university graduate with a master's degree to teach the pupils in a primary school.
Another way to help the SMiEs is to use expansionary fiscal policy, by lowering the tax rates and various local government fees charged to them, which presently amount to about 45% of their net profits.
Or, the Britain-like funding-for-lending scheme may also be considered.
I think there is a scheme in Hong Kong which helps the SMEs.
They can stop increasing (or increase slowly) the cities' minimum wage rates.
The yuan should not be further revalued.
Providing more investment opportunities to the private enterprises will also help.
Formal junk bond markets, business angels, venture capital, private equity, and stock IPOs can all help them to raise the funds they sorely need.
Relative to that of the other countries, China's high overall savings rate is the country's trump card.
It enables the country to persist in her present high-leverage growth model.
I think, right now, the central government and the household sector still have the ability to incur more debts.
(The Japanese government's massive budget deficits are mostly financed by the country's high domestic savings, even though it's said that, right now, only Japan's central bank remains as the sole buyer of the Japanese Government Bonds.)
A formal domestic bond market should be gradually developed and deepened to cater to the needs of the local governments and the public and private enterprises, rather than relying mainly on the country's banking system to do the same jobs.
For one thing, longer-term bonds can be issued by the local governments to raise funds for their infrastructure projects.
This solves the present maturity-mismatch problem facing some of the bank loans.
It also helps to suppress the country's shadow banking system.
China should imitate America's bond-financing financial model, not Europe's or Japan's bank-financing model, especially if yuan internationalisation (reserve currency status) is one of the country's main objectives.
It's known that right now in China, there doesn't exist a unified commission which is solely responsible for regulating all parts of the country's bond markets.
Instead, the present regulating jobs are shared among many different organisations.
I think such a commission, similar to China Securities Regulatory Commission, should be set up to do this important job.
This is especially so if we consider China’s maturing bond derivative market --- more tools of shorting China now become available.
The international hot money, represented by George Soros, can use these tools (shorting instruments like treasury derivatives, securities financing, and foreign exchange swaps) to greatly strengthen their power of shorting China and gain immensely from it.
(Chinese readers: ****finance.gmw.cn/2014-06/23/content_11689907.htm)
It seems that China’s present leaders in general are lack of the sense of crisis --- the possibility of the country’s bond market, stock market, and foreign exchange market all being massively shorted by the international hedge funds at the same time, especially if her present capital control is being relaxed too quickly.
The shorting instruments the international hedge funds need are exactly the tools China's corresponding departments are heavily promoting.
By promoting Hong Kong as the yuan’s main offshore transaction centre, shorting instruments such as foreign exchange swaps and RMB derivatives are then available.
What’s lacking is only the right for the money of the international hedge funds to freely enter and leave the country.
Bond derivatives can be used to short the country’s treasuries, local government bonds and corporate debts.
Securities financing can be used to short the country’s stock market.
Shares can be borrowed from the mutual funds, insurance companies, and the big shareholders of the listed companies, sold high in the market, and bought back when their prices have dropped massively.
This is accompanied by selling short the stock index derivatives.
The country's precarious property market will crumble down at the same time.
Also, the yuan’s continuous revaluation simply enables the foreigners to grab more money from China.
Suppose US$100 million entered China a few years ago at the exchange rate of RMB 8 per US$1.
Having earned a fortune in the country over the years, the exchange rate has become RMB 6.2 per US$1.
The original sum of money has now become US$ 129 million, meaning a profit of US$ 29 million.
And this without counting the massive profits earned by them !
(From the Chinese book ‘Will US prosper and China suffer in the coming 10 years ?’)



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