China Banks Win PBOC Backing to Cut Reserve Ratio -- Update

Several midsize banks said Monday they are eligible for a central bank program aimed at expanding loans to smaller borrowers, part of a targeted step to spur economic growth in China.

Economists and analysts said the inclusion of the midsize banks in the program--which cuts the level of deposits that certain banks must hold against their loans, known as the reserve requirement ratio--is larger than the market thought when the People's Bank of China unveiled it last week.

"We view this as a positive move," said ANZ economist Liu Ligang in a research note. "And we believe that China will likely further relax the monetary policy amid the economic slowdown."

The central bank clarified late Monday on its Twitter-like Weibo microblogging account that the inclusion of midsize banks doesn't suggest an expansion of the reserve ratio cut. Rather, any bank is eligible so long as a significant portion of its lending is to the agricultural sector and smaller companies, the central bank said.

China Merchants Bank, China's sixth-largest lender by assets; Industrial Bank, the eighth-largest listed lender in terms of assets; and China Minsheng Bank, the biggest private lender, said Monday that they had won central bank approval for a cut in their reserve requirement ratio.

The central bank announced a week ago that it was trimming by half a percentage point the reserve requirements for banks that meet its standards for loans to the rural sector and smaller companies. Before the cut, most Chinese bank were required to keep 20% of their deposits on reserve with the central bank as a cushion against liquidity and repayment problems.

In announcing the reserve cut, which took effect Monday, the central bank said it would affect about two-thirds of the nation's city commercial banks as well as rural lenders. But the impact of the move will be larger than initially anticipated with midsize lenders also on the list, analysts said.

The reserve ratio cut will effectively free up more money for banks to lend, though it falls short of a universal cut that would include China's biggest banks.

Analysts originally estimated that a targeted cut applied only to city commercial and rural banks would release about 100 billion yuan ($16.13 billion) in liquidity into China's banking sector. With the addition of the three midsize lenders, the cut could free up an additional 35 billion yuan in liquidity based on their deposit bases in March, Nomura economist Zhang Zhiwei estimated Monday.

Slower economic growth this year has prompted China to introduce several targeted fiscal stimulus measures--including accelerated spending on water, energy and transport projects--and to ensure that sufficient credit is channeled to key parts of the economy. Gross domestic product growth slowed to 7.4% year-over-year in the first quarter of this year from 7.7% in the final quarter of last year.

Shares of the three midsize lenders ended higher Monday on the news and on hopes of further policy easing. China Merchants Bank shares rose 1.6% to 10.39 yuan, Industrial Bank's rose 1.6% to 10.27 yuan, and China Minsheng Bank's gained 3.1% to 7.68 yuan.

To be eligible for the reserve cuts, banks need to extend more than 50% of their new loans to small businesses or the farm sector and have at least 30% of their outstanding loans to either group, the central bank says.

Agricultural Bank of China, the country's third-largest lender by assets and the biggest rural lender, said Monday without elaborating that it wasn't tapped to participate in the central bank's reserve ratio cut.

And China Citic Bank, the country's seventh-largest lender by assets, said it didn't meet the central bank's criteria for a reserve ratio cut. New loans to small businesses accounted for around 35% of its total new lending last year, the bank said, while outstanding loans to small businesses accounted for 18% of total outstanding loans at the end of 2013, it added.

China Merchants Bank said in a filing with the Shanghai Stock Exchange it has received approval from the central bank to cut the reserve requirement ratio. Industrial Bank said it received approval from the People's Bank of China's Fuzhou branch on Friday to cut the reserve level by 0.5 percentage point because it met central bank requirements on lending to key sectors. China Minsheng Bank also told The Wall Street Journal that it received central bank backing for a lower reserve ratio, though it didn't give further details.

Late last month, China's State Council, or cabinet, promised a cut in the reserve requirements for some banks, without providing details. The announced plans followed another targeted move in April aimed at county-level rural commercial banks and rural cooperatives.

Grace Zhu

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