China Relaxes Lending Rules

China has made a move to spur lending, which is expected to support growth in the country without adding an extra financial risk. The nation has taken steps to relax its rules for lending so as to open up more space for growth in the world’s largest emerging market.

Broader Deposit Cap

People's_Bank_of_China

Image from Wikimedia

The move expands the limit of a “deposit” come 2015. At the moment, China has an active cap on the loans Chinese banks can provide, which amounts to 75% of the funds currently held by the financial institution. Once the relaxation takes effect, this will be waived.

The Chinese government estimates that this move will make as much as USD 800 billion available for loans, according to the Xinhua News Agency. Economists, however, clarified that this is only a theoretical figure.

“Due to the economic downturn, credit slowdown and banks’ reluctance to lend, the actual additional lending will be lower than the theoretical number,” said Guotia Junan economists.

Analysts see this as a move to stimulate the demand for consumers to take more loans. Credit Agricole CIB economist Dariusz Kowalczyk told Bloomberg: “The change in rules allows the extension of additional loans worth half of this year’s new lending. Policy makers across the globe are trying to boost demand by increasing bank lending, especially to businesses, so in this sense China’s efforts to boost lending will fit well into the picture.”

Around the world, central bankers continue to find ways to boost investments. So far, the elevated debt levels present in developed countries curb the government’s scope respond. The low borrowing costs also add an extra limitation for consumers to maneuver around their finances.

In this context, the People’s Bank of China’s (PBOC) move to relax the loan rules is a way to support growth in a sufficient manner whilst avoiding a borrowing binge and political discontent.

Rising Stocks

With these steps to bolster the economic growth, the Shanghai Composite Index rose to its highest level since January 2010. Hong Kong shares also received a lot of growth throughout the whole year, thanks to these economic moves.

Official data show that the nation’s largest lenders, China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd., both experienced over 3% growth in Hong Kong, while the shares of these firms reached a six-year high in the mainland.

As to how the country will go about this plan, the PBOC will factor in the savings that the lenders have for non-deposit-taking institutions. Once the central bank waives the reserve requirement for deposits, the loan-to-deposit ratio of banks will be lower.