The People's Bank of China (PBOC) is weighing changing rules governing how loan-to-deposit ratios are calculated at banks, a move that would boost liquidity conditions, sources with direct knowledge told Reuters.
The banking-sector sources said the PBOC, during a meeting with domestic financial institutions, revealed it is planning to include savings held by banks for non-deposit-taking financial institutions into banks' deposits, which will expand the base for calculating loan-to-deposit ratios.
Under the current rules, Chinese banks are allowed to lend up to 75 percent of their deposits.
According to the sources, 24 major financial institutions were told at the meeting that even if interbank deposits are included in the base, they may not need to set aside additional reserves, leaving more liquidity available for lending and investment.
The move is seen as another attempt to reinvigorate productive business investment without resorting to an across-the-board cut to reserve requirement ratios (RRR).
A 50-basis-point cut to the RRR is estimated to pour 2.4 trillion yuan ($386.65 billion) into the system after taking into account the money-multiplying effect of fresh lending on the net money supply.
However, sources said that the possible policy change had been a subject of debate within the central bank and as of last week had not been formally approved by the top leaders.
The PBOC did not answer phone calls requesting comment.
Chinese stock markets, which had pulled back from recent peaks hit earlier in the week, rallied sharply on Thursday and Friday after rumors of the meeting began circulating in local media. The CSI300 bank index rose more than 10 percent in just two days.
“After the news [by local media], market players lowered their expectation of a reserve requirement ratio cut, which is widely seen to be not effective to help the real economy,” said Du Changchun, analyst at Northeast Securities in Shanghai.
The news comes after sources told Reuters the PBOC had already effectively loosened enforcement of standing LDR rules to allow more capital to flow into the system in late October, prompted by a raft of concerns including looming deflationary pressure and sliding industrial activity.
However, that loosening was followed by a massive, heavily leveraged rally in Chinese stock market, without any noticeable impact on lending or short-term money rates.
This is bad news for reformers, economists say, as it suggests that previous easing measures have once again flowed primarily into speculative ventures, as they did during China's stimulus package in 2009, widely blamed for producing asset bubbles and bad debt.
“Overall confidence in the national economy has worsened and loan demand has declined to record lows,” wrote Oliver Barron at NSBO in a research note.