Removal of 20-year-old rule a boon to banking sector

Fourth, the abolition of the ratio will promote the healthy transformation of the financial sector. In the past, as in the real estate up-cycle, there were a lot of lending requirements from the property market. However, due to the LDR restrictions, banks' lending amounts were limited. This meant that banks were forced to broaden their financing channels by investing in trusts, brokerages and fund subsidiaries.

But now as traditional financing channels gradually decline, such institutions are being forced to reform. They will transform from financing-channel businesses to asset management, which will eventually lower the cost of funds.

Fifth, the future of macroeconomic policy will remain accommodating. Removal of the LDR seems like a micro policy adjustment, but it reflects the current trend of the country's macroeconomic policy. When downward economic pressure is increasing, maintaining an accommodating macroeconomic policy is essential for stabilizing the domestic market.

In addition to conventional monetary policies such as a lower deposit reserve and interest rates, further reducing constraints on banks and stepping up efforts to push forward banks' market-oriented reform are also important easing measures.

There are also market analysts who believe that after canceling the LDR, the rule that prohibits banks from engaging in securities business may also be relaxed, which is a significant reform.

The LDR is an outdated regulation that had long constrained the healthy development of China's banking sector. Its abolition not only has a significant impact on the country's banking market, but also helps increase the banking sector's market-oriented reforms, and promotes the marketization of interest rates.

The author is a senior researcher with Anbound Consulting, a public policy think tank. The views do not necessarily reflect those of China Daily.