Fri, Jun 26, 2015 - Page 15 News List

China makes move to end loan caps

Bloomberg

China took one of its biggest steps in banking reform, moving to end a two-decade-old rule that has capped lending relative to deposits as Chinese Premier Li Keqiang (李克強) seeks to usher in market-based economics.

An amendment to the banking law will remove the 75 percent limit, China’s State Council said on its Web site on Wednesday. The Standing Committee of the National People’s Congress needs to give approval at its meeting in March next year.

While the change has the potential to boost credit growth, a bigger constraint may be limited demand for funds in a faltering economy. Looming now is what the central bank has called one of the “riskiest” parts of financial reform: ditching a ceiling on the interest rates that lenders pay on deposits, a move that may come in the second half of this year.

“The real constraint on bank lending is risk aversion,” said Qu Hongbin (屈宏斌), an economist at HSBC Holdings PLC in Hong Kong. “More aggressive monetary policy easing is still the most effective antidote to the slowdown in lending growth.”

The State Council plans for authorities to continue to monitor banks’ loan-to-deposit ratios.

Over the past two years, the Chinese government has removed a floor on lending rates, allowed banks to pay up to 50 percent more than benchmark deposit rates and established a deposit insurance system. Li aims to boost the role of markets in a state-run banking industry that has US$29 trillion of assets, almost twice the amount of its US counterpart.

The central bank has indicated that a cap on deposit rates is likely to be scrapped this year. The risk: excessive competition for deposits could flow through to higher borrowing costs for companies and instability in the financial system.

The loan-to-deposit move does not affect a separate constraint on lenders, the reserve requirement ratio, which stipulates the amount of money that lenders must park at the central bank. That ratio is at 18.5 percent of deposits for the biggest lenders after two cuts this year.

Larry Hu (胡偉俊), head of China economics at Macquarie Securities Ltd, said the loan-to-deposit change “marks another key step in China’s financial deregulation, a major market theme now and in the coming years.”

Hu described the reserve ratio and the loan ratio as “the two most outdated and distorted regulatory measures in China’s financial system.”

The shake-up is five years after the nation completed the stock market listings of the last of its dominant big four banks, which include the Industrial and Commercial Bank of China Ltd (ICBC, 中國工商銀行). The law limiting lending to 75 percent of deposits has been in place since 1995.

Removal of the cap will be good for bank earnings and valuations, easing competition for deposits, according to Sanford C. Bernstein & Co analysts led by Hou Wei. They estimated that a 1 percent increase in the ratio would lead to a 1 to 2 basis-point improvement in net interest margins and up to a 1.2 percent increase in banks’ earnings next year.

While the loan-to-deposit level for the industry was 66 percent in March, and the China Banking Regulatory Commission eased the requirement last year by changing the method of calculation, it has remained a constraint for some listed lenders. Bank of Communications Co’s (交通銀行) ratio was about 74 percent in March, while China Construction Bank Corp’s (中國建設銀行) was 72 percent.

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