China's Deposit Rule Change Postpones RRR Cut : HSBC -- Barron's Blog

        By Shuli Ren
        Hong Kong today is all about the People's Bank of China's new easing rule on how it defines loan-to-deposit ratios. The central bank said from next year on, the loan-to-deposit calculation will include interbank deposits, which means a bigger base and more loans. Currently, banks can lend only up to 75% of their deposit base. But the news gets better: Interbank deposits will have a zero deposit reserve ratio, which surprised the market and propelled a rally today.
        At the noon break, the Hang Seng China Enterprises Index rallied 4% and the Hang Seng Index was up 1.9%. The Shanghai Composite Index gained 0.9%. The rally was led by financials - insurance companies, securities houses and banks.
        But looking at this as glass half-empty, the deposit change "may postpone the market's expectation for an across-the-board RRR cut," which is a better policy, economists from HSBC wrote in a morning note.
        This is because this deposit rule change is substantial - the equivalent of a 160 basis points cut in banks' required reserve ratio. Here are economist Qu Hongbin and team:
        By the end of Q3 2014, total deposit of non-deposit-taking financial institutions at banks reached to RMB 10.3 trillion, including RMB2.5 trillion of deposit agreements from insurance companies which are already included in the loan-to-deposit ratio calculation. Therefore the new changes in the loan-to-deposit calculation rules imply a potential injection of RMB 5.85 trillion of new credit into the market.
        Meanwhile, total ordinary deposit at banks reached around 117 trillion in November 2014. Assuming a 20% RRR rate (for big banks), the new loan-to-deposit rule would therefore be theoretically equivalent to a 160bp RRR cut.
        By comparison, the central bank's 500 billion yuan short-term cash injections in the form of medium-term lending facilities, or MLF, this fall is peanuts.
        China's central bank is seen to be resistant to broad-based monetary easing. It is loosening its grip, expanding its balance sheet at a faster pace than the GDP growth this year, but is also wary of a bubble. Hence, we have the quantitative easing with Chinese characteristics - from MLF to loan-to-deposit rule change.
        Meanwhile, HSBC economists worry this deposit rule change is an imperfect substitute to the broad-based RRR rate cut, because it benefits the smaller banks less, because "the main source of funding for small banks comes from deposits of bigger banks, which are not exempted from the deposit reserve requirement."
        On Friday in New York, the iShares China Large Cap ETF ( FXI), heavily packed with Chinese banks, rose 3.4%. The iShares MSCI China ETF ( MCHI), which has less weight on Chinese banks, rose only 2.5%. The Deutsche X-trackers Harvest 300 CSI China A-Shares Fund ( ASHR) rallied 6.8%. The Market Vectors China ETF ( PEK) jumped 6.6%.
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        (END) Dow Jones Newswires

        December 29, 2014 00:25 ET (05:25 GMT)

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