China to cut RRR by 50 basis points

Banners for financial institutions in a street in Shanghai. [Photo/China Daily]

BEIJING -- China will lower banks' reserve requirement ration (RRR) by 50 basis points starting Feb 5,2015, the country's central bank said Wednesday.

Related story: Policy changes loom for financial institutions by Jiang Xueqing

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Regulators are expected to further cut interest rates and reserve requirement ratios, ease the rules on loan-to-deposit ratios and continue opening up the financial sector by giving a green light to the establishment of more private banks this year. Here are some policy changes that economists and banking analysts are widely expecting:

Changing rules on loan-to-deposit ratio calculation

Starting on Jan 1, the central bank eased the stringent loan-to-deposit ratio requirement for commercial banks to leave more liquidity available for lending.

The loan-to-deposit ratio is a statutory supervisory indicator intended to prevent banks from excessive lending. Domestic banks are allowed to lend up to 75 percent of their deposits.

The People's Bank of China has expanded the base for calculating loan-to-deposit ratios by including in the calculation of deposits the savings that are held by banks for non-deposit-taking financial institutions.

China International Capital Corp said the rule changes could see an extra 7 trillion yuan ($1.14 trillion) of savings held by banks for non-deposit-taking financial institutions classified as deposits. As a result, banks' loan-to-deposit ratios may drop to 60 percent from 64.2 percent at the end of September, CICC's analyst Huang Jie estimated.

By classifying more kinds of savings as deposits, commercial banks will have less pressure to compete for deposits. It will bring down deposit and lending rates and eventually help lower the financing costs for domestic companies, said Lian Ping, chief economist at the Bank of Communications Co Ltd.

Although banks should set aside additional reserves for the newly included deposits, the PBOC has set the reserve requirement ratio at zero for the time being, which means banks do not need to hold additional reserves at present.

The move is seen as another attempt to reinvigorate productive business investment without resorting to an across-the-board cut to reserve requirement ratios.

Economists said the PBOC decided not to resort to an across-the-board RRR cut because it does not want to send a signal that monetary policy will become "too loose".

Li Shanshan, an analyst at Bocom International Holdings Co Ltd, said: "The central bank released short-term liquidity in recent months mainly through monetary policy tools. Although it may cut RRR and interest rates this year, the central bank is unlikely to do so within a short time."

Interest rate and RRR cuts

The PBOC cut the RRR twice in 2014. Effective June 16, it lowered the RRR by 50 basis points for commercial banks that had extended a certain portion of their loans to the farming sector or small businesses. The move followed a cut in April for county-level rural commercial banks and rural cooperative banks.

Zhu Haibin, chief China economist at JPM organ Chase & Co, forecast that the central bank will lower RRRs two or three times in the first half of 2015. It is also expected to cut interest rates further this year.

On Nov 22, the PBOC cut the one-year benchmark lending rate by 40 bps to 5.6 percent and the one-year benchmark deposit rate by 25 bps to 2.75 percent. Other benchmark deposit and lending rates were lowered accordingly.

"The latest interest rate cuts will have a visible impact on the banking sector in the first half of 2015, especially because the rate cut was asymmetric," Lian said.

"About 35 to 40 percent of the bank deposits are current-account deposits, on which the benchmark deposit rate is 0.35 percent. After the central bank cut lending rates, banks experienced an interest margin squeeze."

Some economists advised the central bank to further reduce current-account deposit rates to prevent interest margins from narrowing too rapidly and prevent banks from undertaking more risk than before.

More private banks

In 2015, China will deepen the reform and opening-up of its banking sector by enabling private capital to enter various banking institutions through multiple channels, the China Banking Regulatory Commission announced on Dec 23.

Chairman Shang Fulin told a recent national video conference on the supervision of the banking sector: "The CBRC will expand pilot programs for privately funded banks, accelerate the launch of guidelines on the development of such banks and improve their regulatory framework."

Market insiders said the CBRC is considering promoting private capital to set up banks in China's north-eastern, central and western regions where financial services are weak.

Some of the newly approved banks such as MYbank, which boasts the recently listed Alibaba Group Holding Ltd as a major founder, will apply Internet ideas and techniques to banking activity from the very beginning.