China's Stricter Capital Rules Will Curb Loans, Goldman Says
China’s plan to impose tougher capital rules on banks will slow loan growth to a pace that more closely matches economic expansion, according to Goldman Sachs Group Inc.
A draft proposal by the banking regulator calls for banks to add a capital adequacy ratio buffer of as much as 4 percent to shield against economic swings, a person with knowledge of the matter said yesterday. The new rules would boost the overall minimum capital adequacy ratio for the largest lenders to as high as 15 percent from 11.5 percent now, the person said.
“We believe the countercyclical capital buffer, if it is implemented, will have a profound impact on bank lending growth ahead,” Beijing-based Goldman Sachs analysts Ning Ma and Richard Xu wrote in a note today.
The capital requirement would cut loan growth to 12 percent to 16 percent, a rate that more closely tracks nominal gross domestic product expansion, from 20 percent now as banks try to avoid triggering the “countercyclical” buffer, Ma and Xu said. China’s banks extended a record $1.4 trillion of new loans in 2009, fueling asset bubbles and concerns about bad debts.
The China Banking Regulatory Commission said in a text message today it doesn’t currently have any new requirements for large banks’ capital. The regulator didn’t say whether it plans to change the requirements.
Common Equity Ratio
Agricultural Bank of China Ltd. fell as much as 4.9 percent in Hong Kong trading, the biggest intraday drop since its July 16 stock market listing. China Construction Bank Corp. declined as much as 2.4 percent, the most since Aug. 11.
Under the draft proposal, Chinese banks would be required to have common equity equal to at least 6 percent of risk- weighted assets, the person said, declining to be identified as no announcement has been made. The plan is subject to change as the regulator is seeking feedback from lenders, the person said.
The proposed rules also call for a Tier 1 capital ratio of at least 8 percent, and a 10 percent capital adequacy ratio. Banks deemed “systemically important” will have to comply by 2012, with the deadline set at 2016 for other lenders, the person said.
Assuming the “big banks” are systemically important and the full 4 percent capital buffer is implemented, Chinese lenders face a capital shortage of 484.2 billion yuan ($72 billion) next year and a deficit of about 2.8 trillion yuan in 2016, Guosen Securities Co. analyst Qiu Zhicheng wrote in a note yesterday.
GDP Slowdown
“There will be more capital raising as a result, especially for large banks as their deadline is short,” said Dariusz Kowalczyk, Hong Kong-based chief economist at Credit Agricole CIB. “Their lending capacity will be constrained, which will slow GDP growth and limit upside” for the yuan.
The required capital buffer against economic swings could be increased to 5 percent if needed, the person said.
China’s rules would be stricter than capital requirements announced Sept. 12 by the Basel Committee on Banking Supervision in response to the global financial crisis, and give lenders less time to comply.
The new Basel rules require banks to have a 4.5 percent common equity ratio within five years, and to add an additional 2.5 percent buffer by Jan. 1, 2019. The Tier 1 capital requirement was set at 6 percent. Tier 1 capital, whose definition has been narrowed by the Basel committee, includes common equity and perpetual preferred stock.
Banks are currently required to have common equity equal to 2 percent of total assets and 4 percent Tier 1 capital.
Loan Reserves
Chinese lenders have announced plans to raise more than a combined $84 billion from equity sales since the beginning of 2010. The biggest banks are currently subject to a minimum capital adequacy ratio of 11.5 percent, while the requirement for other publicly traded lenders is 10 percent or more.
Domestic lenders had an average capital adequacy ratio of 11 percent as of June 30, with the Tier 1 ratio standing at 9 percent, according to the CBRC.
Chinese “systemically important” banks also need to maintain loan-loss reserves equivalent to at least 2.5 percent of total lending by 2012, while other banks should comply by 2016, according to the person. The regulator will also introduce a leverage ratio of having banks’ core capital accounting for at least 4 percent of total assets, the person said.
--Luo Jun, Zhang Dingmin. Editor: Philip Lagerkranser, Russell Ward
To contact Bloomberg News staff on this story: Luo Jun in Shanghai at +8621-6104-7021 or jluo6@bloomberg.net
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
Rate this Page