Falling Bank Deposits Add to China Economy Warning Sign

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ICBC Falling Deposits
ICBC, the world’s largest lender by assets, posted the biggest decline in funds during the third quarter, with its deposits dropping by 388 billion yuan ($63 billion) from June to 15.3 trillion yuan. Photographer: Brent Lewin/Bloomberg

Chinese bank deposits dropped following a crackdown on lenders manipulating their numbers and “illicit” means of attracting money, threatening to weigh on credit growth and hinder efforts to reignite the economy.

Four of the five biggest banks, led by Industrial & Commercial Bank of China Ltd., posted a drop in deposits as they reported third-quarter earnings this week. Central bank data showed it was the first quarterly decline for the nation’s banking industry since at least 1999.

The lower deposit levels are likely to curtail credit as banks are prohibited from lending more than 75 percent of their quarter-end holdings, while a sustained drop could hamper government efforts to rejuvenate an economy forecast to expand this year at the weakest pace since 1990. The lenders may also come under pressure to tap more expensive financing.

“With banks now less able to window-dress their deposit figures, some will be forced to scale back lending to meet loan-to-deposit requirements,” Julian Evans-Pritchard, a Singapore-based China economist for Capital Economics Ltd., said by phone today. “Regulatory controls are getting harder for banks and that’s weighing on credit growth.”

ICBC, the world’s largest lender by assets, posted the biggest decline in funds during the third quarter, with its deposits dropping by 388 billion yuan ($63 billion) from June to 15.3 trillion yuan. Bank of China Ltd., Agricultural Bank of China Ltd., and Bank of Communications Co. also reported declines. Only China Construction Bank Corp., the nation’s second-largest, had an increase.

Bad Loans

As a housing-market slump drags on the nation’s growth, bad loans are piling up. Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans, while the combined profit growth of the five biggest banks slowed to 6 percent from 10 percent a year earlier.

Banking shares rallied today, led by Bank of Nanjing Co. and Bank of Ningbo Co., amid speculation that concerns about the outlook for lenders are overstated. Leading banks may gain more than 30 percent as their share prices imply a nonperforming loan level of 10 percent, China International Capital Corp. analyst Huang Jie wrote in a note. That compares with the industry average of 1.08 percent as of June 30.

‘Illicit’ Tactics

In September, the China Banking Regulatory Commission introduced rules to curb volatility in deposits and eliminate the use of what it termed as “illicit” means such as kickbacks and higher-than-regulation interest rates to attract money. Previously, lenders reported surging deposits at the end of each quarter, with a slump typically in the next month.

The new rules could lead to a gradual weakening of deposit and loan growth for the next few months, May Yan, a Hong Kong-based analyst at Barclays Plc, said this month.

Industrywide data show it’s unusual for yuan-denominated deposits to decline on a quarterly basis. A 950 billion yuan fall in the third quarter to 112.7 trillion yuan was the first since at least 1999, according to data from the People’s Bank of China.

“The costs of funds would rise because banks might have to resort to other, costlier channels,” said Castor Pang, head of research at Core-Pacific Yamaichi in Hong Kong. “Rising costs of funds are bad for the economy because they hurt investment sentiment, as companies become less willing to borrow.”

Injecting Money

The government is trying to support lending and limit funding costs for companies, with steps such as injecting money into some banks while avoiding cutting benchmark interest rates.

The central bank last month provided 500 billion yuan of liquidity through a so-called standing lending facility to the five biggest banks, said a government official familiar with the matter. It plans to add about 200 billion yuan at some national and regional lenders, a person with knowledge of the matter said this month.

China’s economy may grow 7.4 percent this year, according to the median estimate in a Bloomberg News survey, compared with a government target of “about 7.5 percent” and last year’s 7.7 percent.

“Low deposit growth is an accurate indicator of the state of free cash flow for consumers and businesses alike,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., said in a note. “The situation looks negative.”

— With assistance by Jun Luo

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