The People’s Bank of China (PBOC) will change rules governing how loan-to-deposit ratios are calculated at banks starting from next year, according to a copy of a central bank document seen by Reuters, in a move that will boost liquidity conditions.
The PBOC will include savings held by banks for non-deposit-taking financial institutions in banks’ deposits, which will expand the base for calculating loan-to-deposit ratios, the document said. Sources with knowledge of the situation said last week that the PBOC was weighing such a rule change.
Under the current rules, Chinese banks are allowed to lend up to 75 percent of their deposits. The PBOC did not respond to requests for comment.
The sources said 24 major financial institutions were told at a meeting that even if interbank deposits are included in the base, they may not need to set aside additional reserves, leaving more liquidity available for lending and investment.
The move is seen as an additional attempt to reinvigorate productive business investment without resorting to an across-the-board cut to reserve requirement ratios (RRR).
A 50-basis-point cut to the RRR would pour an estimated $386 billion (2.4 trillion yuan) into the system after taking into account the money-multiplying effect of fresh lending on the net money supply.
Chinese stock markets, which had pulled back from recent peaks hit early last week, rallied sharply on the weekend after rumors of the meeting began circulating in local media. The CSI300 bank index rose more than 10 percent in just two days.
Sources said the PBOC had already effectively loosened enforcement of standing loan deposit ratio rules to allow more capital to flow into the system in late October, prompted by a raft of concerns including looming deflationary pressure and sliding industrial activity.
However, that loosening was followed by a massive, heavily leveraged rally in the Chinese stock market, without any noticeable impact on lending or short-term money rates.
This is bad news for reformers, economists say, as it suggests that previous easing measures have once again flowed primarily into speculative ventures, as they did during China’s stimulus package in 2009, widely blamed for producing asset bubbles and bad debt.
