China Alters Reserve Ratio Requirements for Some Banks, Securities Reports

China’s central bank imposed differentiated reserve requirement ratios on some of the nation’s small and medium-sized lenders after January loan growth surged, the official China Securities Journal reported today, citing an unidentified person.
The adjustment, which mainly affected city commercial banks, was made after the Chinese New Year holiday that ended Feb. 8, according to the newspaper, an affiliate of the state-run Xinhua news agency. New lending in January exceeded 1.2 trillion yuan ($182 billion) even after some banks slowed or suspended credit later in the month, according to the report, which didn’t specify whether the ratios were raised or lowered.
The People’s Bank of China this week raised benchmark interest rates for a third time since mid-October to rein in loan growth and as January inflation is estimated to have quickened to a 30-month high. Governor Zhou Xiaochuan on Jan. 4 pledged to use a so-called differentiated reserve ratio system to improve liquidity management this year in addition to tools including interest rates, official reserve ratios and bill sales.
The use of the differentiated ratio, which was probably an increase, “may be a prelude to the broader use of differentiated reserve ratios - this would be a useful tool to control lending by penalizing the most aggressive banks,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB. The reported adjustment may suggest smaller lenders were “more active” in new lending last month, he said.
Small Lenders
Banks may have extended 1.1 trillion yuan of new loans last month, of which 70 percent were made by small lenders, Caixin Online reported today, citing unidentified analysts in financial institutions.
The differentiated reserve requirement system involves setting individual ratios for lenders according to the condition of their balance sheets. Based on the central bank’s formula, the lower a bank’s capital adequacy ratio, the more likely it is to face a different ratio, the Securities Journal said, citing an unidentified analyst. The paper didn’t identify which banks were affected by the adjustment.
After a universal reserve ratio increase last month, the requirement now stands at 19 percent for the biggest banks, excluding any additional restrictions imposed on individual lenders and not publicly announced. Ratios for smaller banks are about 2 percentage points lower.
There remains a “clear need” to mop up liquidity added to the economy from maturing central bank bills and continued foreign-exchange inflows, Kowalczyk said, estimating about 1.5 trillion yuan of notes will come due through April. To rein in liquidity, the central bank may boost reserve ratios universally again later this month or in early March because yields at bill sales, an alternative tool to soak up excess cash, remain too low to attract bids from banks, he added.
--Li Yanping. Editor: Nerys Avery, Sunil Jagtiani
To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net