China Regulator Pledges to Expand Credit as Economy Slows

China’s banking regulator vowed to expand loans and cap borrowing costs, seeking to boost the supply of funds to the real economy as growth slows amid a clampdown on shadow financing.

Lending to small businesses, major infrastructure projects and first-home buyers will be a priority, the China Banking Regulatory Commission said in a statement today. To give banks more capacity to lend, the regulator may ease the ratio of loans to deposits by including some stable sources of deposits in the calculation, CBRC Vice Chairman Wang Zhaoxing said.

Premier Li Keqiang said in a May 30 State Council meeting that the nation will cut funding costs and maintain reasonable growth in credit as economists forecast the weakest expansion in 24 years. Banks’ quarter-end cash demand to meet with regulatory requirements such as loan-to-deposit ratio and a crackdown on off-balance-sheet lending combined to push interbank lending rates to a record in June last year.

“To revitalize the economy, China needs to adjust the structure of its credit supply, especially when demand from big state-owned enterprises is waning while small private firms have little access to funding,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp.

Yuan said the CBRC could start counting some interbank deposits in the loan-to-deposit ratio, giving banks room to expand credit and bolster growth in the world’s second-largest economy.

Limit Leverage

China’s banking law caps a bank’s loans at no more than 75 percent of its deposits to limit leverage. Banks are currently lending about 65 percent of their deposits, and the function of the ratio to prevent credit from overheating will remain unchanged, Wang said at a news briefing in Beijing today.

The country will further increase the credit supply to ease financing difficulties for small businesses, make loan approvals more efficient and lower borrowing costs, Wang said. Policy makers will use tools including open-market operations and the required reserve ratio to adjust liquidity and keep the money-market stable, the CBRC said in its statement.

Lenders are allowed to increase their tolerance of small-business loans that soured, Yang Liping, a CBRC director in charge of smaller national and city commercial banks, said at the briefing.

Yuan Gains

Bank shares declined while China’s currency strengthened. Industrial & Commercial Bank of China Ltd., the nation’s largest lender, fell 0.2 percent at the close of trading in Hong Kong, while China Construction Bank Corp. lost 1.4 percent and Bank of China Ltd. slid 2.2 percent. The yuan climbed the most in a week in onshore and offshore trading as the People’s Bank of China raised its reference rate by 0.14 percent to 6.1623 per dollar, the biggest gain since Jan. 10.

The CBRC has tightened regulation from wealth management products to trusts and interbank lending since last year to prevent defaults from spurring market turmoil. So-called shadow banking, estimated by Barclays Plc to be worth $6.2 trillion, pushed up companies’ borrowing costs and made it harder for the government to curtail debt and rein in soured loans.

China’s efforts to deleverage the economy will increase financial risks, and restructuring of industries with too much capacity will cause more nonperforming loans, Wang said. The financial industry’s overall risks are manageable, he added. The CBRC plans to speed up asset-backed securities and bad-loan write-offs to make better use of existing credit, Wang said.

Property Bubbles

The CBRC will also take measures to rein in bubbles in the nation’s real estate market because reliance of the economy on property and too much credit exposure to the sector could damage the financial system, he said.

China’s economy grew 7.4 percent in the first quarter, the least since 2012, and is forecast to expand 7.3 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

The economic slowdown has hurt borrowers’ ability to repay debt and driven up banks’ bad loans. Nonperforming loans at Chinese lenders increased by the most in the first quarter since 2005 to 646.1 billion yuan ($103 billion) as of March 31, the highest level since September 2008, according to CBRC data.

China’s ruling Communist Party is stepping up measures to combat the slowdown. The State Council on April 2 outlined steps including faster railway spending and tax breaks to help the government meet its goal of about 7.5 percent growth.

The State Council, which dictates central bank policy, decided to make “targeted” reserve-requirement-ratio cuts for banks that have lent money to rural borrowers and small companies, according to a May 30 statement on the central government’s website. That followed a reduction for some rural banks in April.

— With assistance by Jun Luo, and Dingmin Zhang

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