China’s central bank is to boost the amount of reserves some banks must lock away as it moves to contain risks after a surge in credit last month by smaller lenders.
The targeted increase in the reserve requirement ratio is to affect regional banks among others, according to people familiar with the matter, who asked not to be identified, because the move was not made public. While they did not name individual lenders, shares of some banks fell.
Smaller and often riskier banks drove new lending to a record 2.51 trillion yuan (US$384.9 billion) last month, People’s Bank of China (PBOC) data showed.
The rare step of increasing the reserve ratio for a select group of banks is aimed at curbing financial system risks and does not necessarily amount to monetary tightening by the central bank, which guided interest rates lower this week by offering to reduce medium-term borrowing costs for banks.
“This reinforces the view that they are not going to repeat the 2009-2010 kind of credit blowout,” ING Groep NV head of Asian research Tim Condon said in Singapore. “They want to encourage the flow of financing to the corporate sector and that’s consistent with growth objectives, but it’s not going to be easy for zombie companies to borrow money and pile up nonperforming loans.”
The central bank did not respond to a faxed request for comment.
This week’s data from the central bank indicates China’s four biggest banks were not the driving force behind last month’s credit binge. Individual lenders with less than 2 trillion yuan of assets extended a combined 1.45 trillion yuan of the new loans last month, accounting for 60 percent of the total increase, the data showed.
The collective market share for Industrial and Commercial Bank of China Ltd (中國工商銀行), China Construction Bank Corp (ICBC, 中國建設銀行), Agricultural Bank of China Ltd (中國農業銀行) and Bank of China Ltd (中國銀行) dropped to 20 percent last month from almost 40 percent in December last year, the figures showed. The four banks had set lending targets for this year that were little changed from last year, separate people with knowledge of the matter said yesterday.
Bank shares in Shanghai and Hong Kong fell after news of the targeted reserve requirement ratio increase. ICBC and Agricultural Bank shares closed at least 1 percent lower in Hong Kong. Bank of Beijing Co (北京銀行) slumped 2.2 percent in Shanghai, while Bank of Nanjing Co (南京銀行) lost 1.3 percent.
While big banks are showing caution, smaller banks “are desperate to lend,” GF Securities Co (廣發證券) Guangzhou-based analyst Mu Hua said. “I just can’t figure out where would they find so many good projects to lend to. That’s probably raising some red flag to the central bank.”
Still, the central bank is seeking to lower overall borrowing costs to underpin an economy that expanded at the slowest pace in a quarter of a century last year. To guide market interest rates lower, the central bank told banks it can provide cash through its medium-term lending facility at 2.85 percent for six-month loans, down from 3 percent.
The targeted reserve requirement ratio increase follows the central bank’s recent announcement that it would adopt a so-called “macro prudential assessment system” that uses commercial banks’ required reserve ratios to help enforce financial stability.
“The message from the central bank is clear: Credit expansion should not undermine the reforms to reduce overcapacity,” Natixis SA senior economist Iris Pang said.
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