China Delays Tighter Bank Capital Rules to 2013

China delayed tightening bank capital rules to the beginning of next year, signaling support for loan growth as policy makers seek to arrest a slowdown in the world’s second-largest economy.

New draft rules from the China Banking Regulatory Commission aim to set “reasonable” schedules for banks to meet capital targets in a way that helps “maintain appropriate credit growth,” the government said on its website yesterday, without giving a deadline for compliance. The rules, announced in August, had been set to go into effect on Jan. 1, 2012.

The delay in expanding the risk buffers follows three cuts since November in the amount of cash that banks are required to set aside as reserves. The government is propping up credit after new bank loans in April dropped 33 percent from March, missing economists’ forecasts, as Europe’s debt crisis sapped demand for China’s exports and manufacturing slowed.

“Chinese banks are under a lot of pressure,” Chen Xingyu, an analyst at Phillip Securities in Shanghai, said by telephone. The delay is “not a surprise,” as the government is “helping banks ease the pressure to raise capital again.”

Industrial and Commercial Bank of China Ltd., the nation’s biggest lender, rose 0.5 percent to HK$4.55 as of 1:29 p.m. in Hong Kong, while the benchmark Hang Seng Index gained 1.4 percent. China Construction Bank (939) Corp. climbed 0.6 percent while Agricultural Bank of China Ltd. (601288) jumped 1.6 percent.

Slower Expansion

China’s economy, the world’s second largest, expanded 8.1 percent in the first three months of this year, the slowest pace in 11 quarters. The nation’s biggest banks may fall short of their 2012 loan targets for the first time in at least seven years, three bank officials with knowledge of the matter said last month.

The People’s Bank of China will probably cut interest rates in June for the first time since 2008 as it tackles the slowdown, according to China International Capital Corp., the nation’s largest investment bank. Data this weekend may show fixed-asset investment expanded at the slowest pace in a decade, inflation matched a two-year low and industrial output grew by less than 10 percent for a second month, Bloomberg surveys indicate.

The economic growth trend may improve in the second half, strengthening loan demand in some regions, Wang Hongzhang, chairman of Construction Bank, the country’s second-largest lender, said in Hong Kong after a shareholders meeting today.

Construction Bank has been preparing for and can meet the new capital standards, President Zhang Jianguo told reporters.

Capital Adequacy

Systemically important banks must have a capital-adequacy ratio of 11.5 percent, while others need to maintain a level of 10.5 percent, the government reiterated in yesterday’s statement. Chinese commercial lenders’ capital adequacy ratio averaged 12.7 percent as of March 31, according to CBRC data.

“Capital requirements should be stricter in economic upturns, but relatively lenient in economic downturns,” JPMorgan Chase & Co. economists led by Zhu Haibin in Hong Kong wrote in an e-mailed report. Implementing the new rules “will help Chinese banks to build up loss-absorption capacity and to improve risk management system.”

Adopting the new capital rules will lower major Chinese banks’ capital adequacy ratio by as much as 2 percentage points due to changes in risk weightings, the requirement to cover operational risks and phasing out unqualified supplementary capital, Chen Xiaoxian, president of China Citic Bank Corp., wrote in the April 16 edition of China Finance magazine, which is affiliated with the nation’s central bank.

Loan Provisions

The draft rules will allow banks to count excess loan-loss provisions as capital, the government said yesterday. Risk weightings for small-company loans and personal credits will be lowered, while those of interbank liabilities will be increased “appropriately,” according to the statement, which didn’t give details.

“We believe the announcement will be incrementally positive for the sector as the wording does hint at a more accommodative tone from regulators,” Nan Sheng, a Hong Kong- based analyst at CCB International Securities Ltd., wrote in an e-mailed note. “The deadline for compliance with the new capital requirements may possibly be pushed back along with the implementation period, which will ease constraints on capital.”

Lenders will have a 10-year grace period to phase out securities they’ve issued that don’t qualify as capital under the new rules, the government said.

The banks will get three years to meet the new capital- adequacy standards, 21st Century Business Herald reported today, citing an unidentified person familiar with matter.

To contact Bloomberg News staff for this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Andreea Papuc at apapuc1@bloomberg.net

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