New PBOC bank deposit rules unlikely to increase lending
People's Bank of China move to enlarge deposit bases at banks will result in far less cash being injected into the financial system than hoped
New rules changing how mainland banks measure their savings base have more to do with squeezing shadow banking than monetary easing, and will inject far less cash into the system than many believe, money traders say.
The People's Bank of China has enlarged the deposit base for banks by telling them to count in it their interbank deposits from non-bank financial institutions.
There is a 75 per cent loan-to-deposit ratio (LDR) for banks. Thus, making deposits larger, by definition, should let banks lend more.
Many see the central bank's move as a stimulus measure. Fitch Ratings said last week that the change would enable banks to boost total credit by up to six trillion yuan.
JP Morgan economist Zhu Haibin wrote on Friday that as banks temporarily do not need to set aside reserves on the additional deposits, the rule change lowers the system LDR by about 500 basis points and "hence removes LDR binding constraint in bank lending".
But others do not expect the rule change to have much impact on lending.
"Some analysts have exaggerated the potential effect of the central bank's move because they only see half of the moon," said Lu Zhengwei, chief economist at Shanghai-based Industrial Bank. "The move is not a policy tool [to ease] but a reform to include deposits that should have been included in the LDR supervision long ago. That means the PBOC can follow up by including interbank loans into the LDR's lending base to keep policy consistency."