China’s central bank broadened lenders’ reserve requirements to cover margin deposits, a move that may drain 900 billion yuan ($140 billion) from the banking system over six months, Bank of America Merrill Lynch said.
The measure will be phased in from Sept. 5 and take full effect Feb. 15, economist Lu Ting said in an e-mailed note yesterday, without saying where he got the information. Reuters earlier reported such a move, citing unnamed banking officials. In Beijing, a central bank press official declined to comment.
China has already raised reserve ratios to record levels to counter inflation running at the fastest pace since 2008. London-based Capital Economics Ltd. said yesterday that the reported move may mean no further increases this year, after previously anticipating that the requirements would rise 1 percentage point by the end of December.
Forcing lenders to set aside more cash may put “some upward pressure on interbank rates,” Bank of America’s Lu said. At the same time, the central bank can “neutralize” that effect by altering its program of bill sales, another tool for locking up cash, he said.
Reserve requirements for China’s biggest lenders stand at 21.5 percent as Premier Wen Jiabao seeks to cool consumer and property prices and limit the risk of asset bubbles after record lending. The central bank has held off for two months in boosting the ratios, the longest pause since the latest series of increases began in November, amid turmoil in global financial markets.
MONETARY TIGHTENING
Reuters reported yesterday that reserve requirements will now cover margin deposits paid by banks’ clients to secure issuance of bankers’ acceptance, letters of guarantee and letters of credit. Such deposits were 4.4 trillion yuan ($689 billion) at the end of July, the news service reported.
The new rules will start to take effect for the biggest banks from Sept. 5, according to Lu. The net effect of the reported rule change “if everything else was unchanged,” would be to tighten monetary policy, Capital Economics said in a note yesterday.
“But in fact, we think any such move would be designed as an alternative to further reserve-requirement increases over the rest of the year.” Lu calculated that the latest move may have an effect equivalent to a 130 basis-point increase in reserve requirements. Capital Economics’ estimate was “roughly 125 basis points.”
LESS CASH TO LEND
Reserve requirements force lenders to park a proportion of their deposits with the central bank, reducing the amount of money available for lending. Policy makers aim to restrain inflation that accelerated to 6.5 percent in July, the fastest pace since 2008.
They are also monitoring the risks from the surge in lending that fueled the nation’s rebound from the global financial crisis. One focus is the credit that has been extended to local-government financing vehicles.
China’s five biggest banks posted first-half profits that surpassed the total of their 14 largest U.S. and European rivals, with Industrial & Commercial Bank of China Ltd. reporting last week that net income rose 29 percent to a record $17 billion.
