China Broadens Reserve Requirements, BofA Says - Bloomberg

(Corrects omitted name and title in second paragraph.)

China’s central bank extended lenders’ reserve requirements to cover their margin deposits to reduce liquidity, according to Bank of America Merrill Lynch.

The measure will be phased in from Sept. 5 and take full effect on Feb. 15, economist Lu Ting wrote in an e-mailed note today, without saying where he got the information. The broader rules may drain 900 billion yuan ($140 billion) from the banking system, the equivalent of an increase of about 130 basis points in the reserve requirement ratio, he said.

Reuters reported today that the central bank planned to widen the base for calculating reserve requirements, citing unnamed banking officials. A central bank press official, who declined to be identified because of the agency’s rules, wouldn’t comment on the note or the report.

China has boosted banks’ reserve requirement ratio nine times since November to a record 21.5 percent for the biggest lenders to curb inflation and asset prices. The last increase was eight weeks ago, the longest gap since the current series began, as smaller companies complain of funding shortages.

Under the new rules, commercial banks’ reserves must include margin deposits paid by their clients to secure the issuance of guarantees such as banker’s acceptances, according to Lu. “Misuse” of bankers acceptances has boosted deposits, he said.

“What we heard is that the PBOC did punish some mid-sized banks for too aggressively expanding bankers’ acceptances,” Lu said in the note.

Total margin deposits for corporate guarantees, of which most are bankers’ acceptances, were 4.4 trillion yuan as of July, with about half of that at small and medium-sized banks, Lu said.

The broadening of reserve requirements may add pressure for interbank rates to rise, according to the note. At the same time, the central bank can cut back on bill sales, another method for draining cash from the financial system, so the economic impact may be “quite limited,” the economist said.

China is unlikely to change its benchmark interest rates, reserve requirement ratio, M2 money supply target or annual loan quota this year, he said.

Industrial and Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and the national postal bank will start paying reserves to the central bank from September 5, Reuters reported, citing people it didn’t identify.

To contact the reporter on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

View the original article here