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."
Lu was referring to widespread speculation that the rule adjustment was an attempt to simulate a major easing move, such as reducing the reserve ratio requirement (RRR) or cutting interest rates, by injecting cash into the system sideways, without flooding the market with more cash than it could digest.
To some analysts, the LDR ratio has not been a constraint on mainland bank lending, so the broadened definition of deposits provides room for lending that banks will not necessarily use.
The latest data issued by the China Banking Regulatory Commission shows that the daily average LDR of mainland banks in the third quarter stood at only 66.8 per cent, up slightly from 64.3 per cent at the end of June.
"Most Chinese banks rarely lend up to the limit of the 75 per cent of their deposits, let alone do so in the current environment of lacklustre cash calls thanks to slowing economic growth," a dealer at a state-owned bank in Shanghai said. "The money some say is being freed up for lending has already been in the markets for a while; it's not like a fresh injection via an RRR cut."
Traders see the new regulations as targeting the growth of interbank deposits created by non-bank institutions, in particular those from the securities industry, special purpose vehicles, non-banking financial deposits as well as overseas deposits.
Fitch said the new regulations would also increase the disclosure of shadow bank lending on the balance sheet and thus improve transparency.
"By recognising these exposures as loans, banks would also have to increase provisioning against non-performing assets," it said.
