China amends LDR rules to bolster growth

Certain loans, including NCDs, will be exempted.

China’s Banking Regulatory Commission announced today that it will exclude 3 items from the numerator in the Loan to Deposit Ratio (LDR): loans backed by financial bonds issued by commercial banks, loans corresponding to re-lending to SMEs, and commercial banks’ loans using on-lending by overseas government or supra-national financial institutions.

Earlier exemptions included re-lending to rural economy, loans to rural economies backed by designated financial bonds, and loans to small and micro firms backed by designated financial bonds.

2 items will be added to the denominator, namely negotiable certificate of deposit (NCD) issued by banks to corporates and individuals, and offshore deposits as contribution to foreign-owned banks.

These actions should help ease credit conditions for the real economy and supports growth. According to HSBC research, there are still downside risks from the property slowdown, and that targeted easing will continue in the coming months in order to sustain the recovery.

Here’s more from the report:

After the exemption, banks will in theory be able to lend as much as they can under the exempt categories. However bear in mind that these two types of loan are higher risks, and banks are already becoming more risk-averse in an environment of slower growth. According to CBRC, actual LDR at commercial banks is only 65.9% as of end of Q1, compared to 66.08% at end-2013. These factors will limit the amount of additional lending banks will extend.

As for Negotiable Certificate of Deposit (NCD), currently the outstanding amount is also quite small given this is a new market. However, it has the potential to offer stronger support to the economy. Local media has reported last week that Bank of China has received the go-ahead to issue individual CDs.

Although this news was not confirmed, regulatory trend suggest CDs will soon be made available to retail customers at major banks, and become a viable alternative to time deposit. In time, this move will have a bigger impact by allowing banks to regain a deposit base that have been invested in wealth management products. This will help boost lending abilities of banks. At the same time, it is another step forward in interest rate liberalization and suggests the financial reforms are still on track despite slower growth.

Finally, exempting financial bonds may pave the way for more issuance of designated financial bonds this year, for example, those issued by China Development Banks to support public housing construction. This is reportedly a RMB1trillion project ad will utilize a mix of financial methods including relending, bond,and loans.