China’s Big Four lenders have 1.5tr yuan gap in deposits

Holdings decline as lenders create 'artificial deposits' to meet requirements

PUBLISHED : Tuesday, 05 August, 2014, 7:31pm
UPDATED : Wednesday, 06 August, 2014, 2:29am

Tighter liquidity on the mainland may have driven a 1.5 trillion yuan (HK$1.9 trillion) gap in deposits at the country's Big Four banks between June and July, highlighting the lenders' practice of creating "artificial deposits" to skirt regulatory requirements.

The decline in deposits was reported by Shanghai Securities News on Tuesday before official July data is released later this month. Mainland banks are held to a 75 per cent loan-deposit ratio monitored by the China Banking Regulatory Commission at the end of each quarter.

To meet the requirement, banks routinely time wealth management funds to fall briefly on the books at the end of the quarter, creating what Shen Jianguang, head of China research at Mizuho Securities, called "artificial deposits". The surge in deposits in the final month of the quarter leads to a decline in the following month and increased volatility in the interbank market.

"Lots of banks are using funds from wealth management products to meet these requirements," Shen said.

A 1.5 trillion yuan difference in deposits between June and July is a substantial drop compared with other quarters. In April, deposits fell 655 billion yuan month on month, Barclays data showed.

An increase in artificial deposits in the second quarter pointed to strong demand for loans, said Raymond Yeung, senior analyst at ANZ Bank, although he noted the liquidity conditions in 2013 and 2014 were difficult to compare.

Early this year, the mainland relaunched initial public offerings after a 14-month block. New listings in the first half of the year could have created demand for loans not experienced in the year before. Local governments also began issuing bonds in late May, creating another new demand.

Although difficult to prove, Yeung said changes made in the first week of July to the way loan-deposit ratios were calculated might have reduced the amount of deposits banks must have to meet requirements.

Many analysts expect the CBRC to do away with loan-deposit ratios in the next few years. The requirements added volatility to the interbank market at the end of each quarter as banks moved cash on to balance sheets to meet them, said Chen Long, a China economist at GaveKal Dragonomics.