China’s Move on Bank Deposits Disappoints


JANUARY 12, 2015

China’s annual economic growth slowed in the January-March period to 7.4 percent from 7.7 percent in the previous three months. (Bloomberg Photo/Brent Lewin)

Shanghai. New rules changing how Chinese 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, Chinese money traders say.

The People’s Bank of China has enlarged the deposit base for banks by telling them to count in it their inter-bank deposits from non-bank financial institutions.

There’s a 75 percent loan-to-deposit ratio (LDR) for banks. Thus, making deposits larger — by definition — should let banks lend more.

Many see the PBOC move as a stimulus measure. Fitch Ratings said in a report on Tuesday that the change would enable banks to boost total credit by up to 6 trillion yuan ($965 billion).

Zhu Haibin, economist at JP Morgan, 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 don’t expect the rule change to have much impact on lending.

Exaggerated potential?

“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 Industrial Bank in Shanghai.

“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,” he said. “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 can digest.

To some analysts, the LDR ratio has not been a constraint on Chinese bank lending, so the broadened definition of deposits provides room for lending that banks won’t necessarily use.

The latest data issued by the China Banking Regulatory Commission shows that the daily average LDR of Chinese banks in the third quarter stood at only 66.8 percent, up slightly from 64.3 percent at the end of June.

“Most Chinese banks rarely lend up to the limit of the 75 percent of their deposits, let alone do so in the current environment of lackluster cash calls thanks to slowing economic growth,” said a dealer at a major state-owned bank in Shanghai.

“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.”

Reserve cut still eyed

Fresh money would be provided by a central bank cut in the RRR, which JP Morgan’s Zhu and many other economists still think the PBOC will eventually make.

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 (SPVs), non-banking financial deposits as well as overseas deposits.

The crackdown makes sense, given signs new players — in particular brokerages — have exploited regulatory loopholes to expand their shadow banking business despite the regulatory crackdown. Official measures are now seen underestimating the shadow sector by up to $2.6 trillion.

Fitch said the new regulations would also increase the disclosure of shadow bank lending on the balance sheet and thus improve transparency.

“By recognizing these exposures as loans, banks would also have to increase provisioning against non-performing assets,” it said.