CHINA MONEY-Lending relaxation to help stabilise market interest rates

Wed Jul 9, 2014 3:43am EDT

Related Topics

* Policy to help relieve impact of seasonal factors on rates

* Move towards letting banks to decide loans themselves

* Estimated 4 bln to 2 trln yuan freed for lending-report

* More regulatory easing needed to help market stability

By Lu Jianxin and Pete Sweeney

SHANGHAI, July 9 (Reuters) - China's decision to ease rules used to calculate loan-to-deposit ratios for Chinese banks (LDR) will moderate spikes in seasonal cash demand from regulatory requirements and thus help stabilise money market rates, traders say.

Regulators have been moving to stabilise money market rate volatility after a severe market squeeze in June last year rattled markets around the world, who misread a short-duration rise as a harbinger of money tightening.

The dramatic stock market slides that ensued caused some to accuse the central bank of clumsiness or worse when it came to managing market sentiment in a period of economic sensitivity.

The latest policy relaxation, announced by the banking regulator last week, excludes loans to small firms and the farm sector from LDR calculation, and includes new items on the savings side of the ratio, including large negotiable certificates of deposit, among other items. {ID:nL4N0PC082]

The move will free between 400 billion yuan to 2 trillion yuan ($65 billion to $323 billion) for banks to lend, according to a research report by Shenyin & Wanguo Securities, and make it easier for banks to meet the LDR at the end of a quarter without tapping the interbank market for short-term funds.

"The relaxation will add to other official steps aimed at stabilising money market rates, particularly helping neutralise the impact of seasonal demand on the rates," said a senior trader at a Chinese state-owned bank in Shanghai.

"It is also a step towards an eventual abolition of the LDR in line with international practices that allow banks to decide their own lending strategy."

The market squeeze in June last year pushed China's short-term money market rates as high as 30 percent, which was seen as a way to force Chinese banks to reduce their exposure to shadow banking activities.

More specifically, money traders and economists said the PBOC was making it more expensive for commercial banks to tap the interbank market for short-term funds they used in turn to mask their dabbling in high-yield, high-risk wealth management products.

At the same time, regulators are considering changing the way it calculates the opening price for benchmark interest rates to reduce the ability of individual banks to manipulate key rates.

TECHNICAL DETAILS

Chinese law currently allows banks to lend out no more than three quarters of their deposits.

To meet regulatory requirements including the LDR, banks engage in intense competition over cash at the end of each quarter so that they can include it in their deposit base, dressing up their quarterly financial statements.

The average LDR for Chinese banks stood at 65.9 percent at the end of the first quarter of this year, data issued by the China Banking Regulatory Commission (CBRC) showed, but it is impossible to tell how much of those deposits were genuine, as opposed to manufactured by tapping the interbank market.

"While the LDR easing will help stabilise rates, it alone will not be enough to prevent banks from pushing for a brief expansion of their deposit base at the end of a quarter to polish their books," said Dong Dezhi, senior money market analyst at Guosen Securities in Shanghai.

Dong and others said that further deregulation is needed in efforts to build a money market that operates in response to genuine supply and demand as opposed to regulatory deadlines.

Indeed, while announcing the LDR easing, the CBRC also said it would work with China's legislators to quicken the revision of the commercial banking law, which many analysts believe would lead to an eventual scrapping of the LDR ceiling..

Rating agency Fitch said in a research report last week that the CBRC's decision was indeed a part of an official drive to ease liquidity conditions.

It warned, however, that the official efforts to spur growth of lending to small companies has the potential to hurt bank credit profiles over the medium term.

Among other changes, yuan deposits transferred to the local branches of foreign banks from their parent companies with maturities of over a year can now be included in the LDR.

Yuan loans funded by international financial institutions or foreign governments will be dropped from the ratio.

And loans funded by bonds sold by banks with remaining maturities of one year or more, and which bond investors have no right to demand early repayments, can also be omitted from LDR.

"The bonds-related provision is particularly important as it implies that regulators will eventually remove all risk-free loans at banks from the LDR calculation," said a trader at a Chinese commercial bank in Shanghai.

Such bonds, mainly subordinate and tier-2 capital debt, are now worth about 500 billion yuan, traders estimate.

($1=6.2 Chinese Yuan) (Editing by Kim Coghill)

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