(Bloomberg) — China's central bank is joining the balancing act of developed-world counterparts as it extended its toolkit to free up at least $800 billion in funds for lenders, seeking to support growth without inflaming financial risk.
The world's largest emerging economy will broaden the definition of a deposit in 2015, boosting the lending capacity of Chinese banks that have to cap loans at 75 percent of funds held. The relaxation, reported by the official Xinhua News Agency yesterday, could make an additional 5 trillion yuan ($800 billion) to 5.5 trillion yuan available, according to analysts at Credit Agricole CIB and Guotai Junan Securities Co.
"Beijing is trying to stimulate lending and they are trying not to use strong measures," said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong. "Policy makers 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 into the picture."
Central bankers worldwide are hunting for new ways to stimulate investment as elevated debt levels in developed nations stifle governments' scope to respond and record-low borrowing costs limit room for monetary maneuvering. As global policy makers grapple with concern that asset bubbles are a by- product of increased liquidity, the People's Bank of China's challenge is supporting growth sufficiently to avoid political discontent while discouraging a renewed borrowing binge.
Stocks rise
China's Shanghai Composite Index climbed to the highest level since January 2010 and Hong Kong shares jumped on optimism authorities are taking steps to bolster economic growth. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the nation's biggest lenders, gained more than 3 percent in Hong Kong, while a gauge of financial shares in the mainland jumped to a six-year high.
The PBOC will include savings held by lenders for non- deposit-taking financial institutions into bank deposits from 2015, Xinhua reported yesterday, citing unidentified lenders. The central bank will temporarily waive the reserve requirement for such deposits, and the change will help lower banks' loan- to-deposit ratio, the news agency said.
The adjustment "can release, in theory, a maximum amount of 5.5 trillion yuan of extra bank credit," Guotai Junan economists led by Ren Zeping wrote in a note today. "However, due to the economic downturn, credit slowdown and banks' reluctance to lend, the actual additional lending will be lower than the theoretical number."
Loan demand
China's new local currency loans this year stood at 9.1 trillion yuan as of November. According to the latest quarterly central bank survey of lenders, the loan demand climate index, a measure of demand for bank credit, fell this quarter to the lowest level since the last quarter of 2008, when China was hurt by the global financial crisis.
"The change in rules allows the extension of additional loans worth half of this year's new lending," said Kowalczyk, who estimates about 5 trillion yuan will be freed up. "This technical ability to lend more doesn't mean there will be more demand for credit. They still need to lower the cost of borrowing by cutting rates further and, crucially, by boosting liquidity via an RRR cut," he said, referring to the reserve requirement ratio.
Mired in industrial overcapacity, factory-gate deflation and a housing slump, China is headed for its slowest full-year economic expansion since 1990.
Policy shift
"Tweaks to how the loan-to-deposit ratio is calculated are part of the broader shift of policy direction in doing more to shore up growth," Pauline Loong, managing director at Asia- Analytica Research in Hong Kong, said in an e-mail. "China's goal for 2015 is essentially to keep the economy from tanking."
The country has added liquidity by stealth at least four times in the past four months via proxies such as China Development Bank Corp. as it balances the need to buoy the economy with efforts to contain a debt pile that's almost doubled in six years. The PBOC rolled over at least part of a 500 billion-yuan three-month lending facility to the largest Chinese lenders this month, days after it injected 400 billion yuan via CDB, according to people familiar with the steps.
