China’s central bank is joining the balancing act of developed-world counterparts as it moves to free up at least US$800 billion in funds for lenders, seeking to support growth without inflaming financial risk.
The world’s largest emerging market plans to broaden the definition of a deposit next year, boosting the lending capacity of Chinese banks that have to cap loans at 75 percent of funds held. The relaxation, reported by the Xinhua news agency on Sunday, could make an additional 5 trillion yuan to 5.5 trillion yuan (US$804.15 billion to US$884.56 billion) available, analysts at Credit Agricole CIB and Guotai Junan Securities Co said.
“The change in rules allows the extension of additional loans worth half of this year’s new lending,” Hong Kong-based Credit Agricole CIB economist Dariusz Kowalczyk said. “Policymakers across the globe are trying to boost demand by increasing bank lending, especially to businesses, so in this sense China’s efforts to boost lending fit well.”
Central bankers worldwide are hunting for new ways to stimulate investment as elevated debt levels in developed nations stifle how governments can respond and record-low borrowing costs limit room for monetary maneuvering.
Amid global concerns that asset bubbles are a by-product of increased liquidity, the People’s Bank of China’s challenge is to support growth sufficiently to avoid political discontent while discouraging a renewed borrowing binge.
China’s Shanghai Composite Index climbed to the highest level since January 2010 yesterday morning and Hong Kong shares jumped the most in a year on optimism that authorities are taking steps to bolster economic growth.
Industrial & Commercial Bank of China Ltd (中國工商銀行) and China Construction Bank Corp (中國建設銀行), the nation’s biggest lenders, gained more than 3 percent in Hong Kong, while a gauge of financial shares elsewhere in China jumped to a six-year high.
The central bank plans to count savings held by lenders for non-deposit-taking financial institutions as bank deposits next year, Xinhua reported, citing unidentified lenders. The bank is to temporarily waive the reserve requirement for such deposits, and the change is expected help lower banks’ loan-to-deposit ratio, Xinhua reported.
The adjustment “can release, in theory, a maximum amount of 5.5 trillion yuan of extra bank credit,” Guotai Junan Securities (國泰居安證券) economists led by Ren Zeping (任濟平) wrote in a note yesterday.
China’s new local currency loans this year stood at 9.1 trillion yuan as of last month. According to the latest quarterly central bank survey of lenders, the loan demand climate index — a measure of demand for bank credit — has fallen to the lowest level in the fourth quarter since the last quarter of 2008.
“It is pretty clear that Beijing is trying to stimulate lending and they are trying not to use strong measures” such as a reserve requirement ratio cut or a change in the 75 percent loan-to-deposit ratio, Kowalczyk said.
The weaknesses in the economy mean that the impact of the credit expansion will be “limited,” Barclays PLC lead China economist Chang Jian (常健) said in Hong Kong.
“Quotas for bank lending have already been relaxed,” she said. “As growth is weak and banks are concerned about bad loans, banks are prudent in lending.”
Still, the new definition of deposits could help the central bank monitor and manage liquidity, she said.
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