New rules imposed on interbank deposits

Decision will affect online monetary funds: experts

China's central bank has decided to impose reserve requirements on interbank deposits starting from 2015, a move that will affect yields from monetary funds such as Yu'ebao in the long term, experts said Sunday.

Interbank deposits, including savings held by banks for non-deposit-taking financial institutions, will be calculated as regular bank deposits, according to a document issued by the People's Bank of China (PBOC) and posted by news website sina.com.cn late Saturday.

The document has not yet been published on the PBOC's website.

Banks will be required to set aside reserves for interbank deposits, but the reserve requirement ratio (RRR) will be temporarily set at zero, it said.

The PBC was not available for comment on Sunday. Currently, big commercial banks in China are required to put aside 20 percent of their regular bank deposits as reserves.

The document alleviated market concerns that the RRR for interbank deposits could also be set at 20 percent.

"The zero rate means the central bank does not plan to tighten liquidity in the market, but it is also different from an RRR cut that injects liquidity into the market," Xu Gao, chief economist with China Everbright Securities, said in a research note sent to the Global Times Sunday.

But the move will stimulate banks' lending appetite, as the adjustment will expand the base for calculating the loan-to-deposit ratio, Xu noted. Currently Chinese banks are allowed to lend up to 75 percent of their deposits.

The central bank's move came after a State Council meeting held on November 19, which said more flexibility should be given to calculation of the loan-to-deposit ratio for financial institutions so that they can offer more helpful services for small and micro-sized enterprises as well as the agricultural sector.

Given the adjustment, analysts said the central bank is not likely to make an overall cut in the RRR in the near term. The PBOC made two targeted RRR cuts in April and June, in an effort to boost liquidity and support the agricultural sector and small firms.

There are concerns that the PBC's decision to set the RRR for interbank deposits at zero will lead to arbitrage activities by banks, as they will be able to convert regular bank deposits into interbank deposits so as to avoid setting aside reserves, Guotai Junan Securities said in a research note released Sunday.

But Xu from Everbright Securities said such concerns are not warranted. "If there is large-scale arbitrage, the central bank can raise the RRR for interbank deposits," he said.

The PBC's move also follows calls by the banking industry for stricter regulation of the Internet finance sector, the emergence of which has intensified competition for deposits, experts said.

The adjustment will not have an immediate effect on the yields of online monetary funds such as Yu'ebao, but if the RRR is raised, the yields will be lowered, said Fu Peng, head of Beijing-based research institute CMHRI.

A spokeswoman for Alipay, which set up the Yu'ebao online monetary fund with Tianhong Asset Management Co, said Sunday that the company will comment on the adjustment later when it verifies the news.

Yu'ebao, the country's largest monetary fund with 149 million users by the end of September, offered an annualized return of 4.852 percent to investors on Sunday, down from a record high of 6.763 percent on January 2, but still higher than banks' one-year deposit rate of around 3 percent.

Wang Dengfeng, a fund manager with Tianhong, said in March that nearly 90 percent of the money raised by Yu'ebao went to interbank deposits.

"Being exempt from bank reserve requirement management has contributed to the high returns of Yu'ebao and other online monetary products," Fu said.

Sheng Songcheng, head of the PBOC's Statistics and Analysis Department, wrote in an article published in May that the annualized return of Yu'ebao would be lowered by 1 percentage point if a 20 percent RRR was applied to the monetary fund's money held as bank deposits.