New deposit rules to increase lending fund

More capital is expected to be made available in the domestic lending market as China adjusts its rules for calculating bank deposits next year.

The People's Bank of China (PBOC) issued a circular regarding inter-bank deposits as regular bank deposits, and temporarily set the reserve-requirement ratio for newly increased deposits at zero.

Under the new rules, some interbank deposits, including savings for securities and transaction settlement as well as savings held by banks for non-deposit-taking financial institutions, will be calculated as regular bank deposits.

"This shows the central bank's attitude to preserving fairness in the financial market," chief bond analyst with CITIC Securities Deng Haiqing said. "The zero ratio strategy aims to stabilize the market."

Analysts say the new rules are a response to the current tight liquidity environment, and they would lower banks' loan-to-deposit ratios, thus, increasing capital available for lending.

Financial derivatives researcher Zhao Qingming said that larger capital outflow in November, huge investment into the stock market this month and banks' need for more deposits at the yearend were to blame for the tight liquidity.

Director of the central bank's surveys and statistics department Sheng Songcheng said there was huge capital in some popular money market funds. Sheng cited Yu'ebao, an online investment fund created by e-commerce giant Alibaba, which has attracted nearly 100 billion U.S. dollars in investment since it was established on June 13, 2013.

Ping An Securities said these booming new money funds had put pressure on bank's loan-to-deposit ratios.

It is expected that in the long term the rules will help with the smooth transition to interest rate liberalization, and the temporary zero ratio will also ease concerns over tight liquidity.

A forecast by Haitong Securities said that the adjustment is expected to unleash 5.5 trillion yuan (899 billion U.S. dollars) of credit available for lending.

"We expect the average loan-to-deposit ratio of commercial banks will be reduced by 5 percent," the forecast said.

Guo Tianyong, a professor at the Central University of Finance and Economics, said the new rules would make deposits the main denominator in calculating the loan-to-deposit ratio. The lower ratio means banks have more capital at their disposal. "It reflects more flexibilities in monetary policy," Guo said.

Lian Ping, chief economist with the Bank of Communications, believes the new adjustment will mainly benefit small and medium-sized banks, because large banks are not really affected by the loan-to-deposit ratio.

"The adjustment will not have a huge effect on market liquidity," he said, "The rules reveal that the authorities are relatively cautious and prudent."

However, some analysts believe there is no direct correlation between the new rules and loan limit or loan-to-deposit ratio as the China Banking Regulatory Commission (CBRC) has not released anything on the issue.

In a bid to address the high financing costs for many enterprises, the PBOC cut interest rates for the first time in more than two years in November.