China banks seen profiting from PBOC’s reserve ratio cut

The People’s Bank of China headquarters stand in Beijing, China, on Monday, Feb. 26, 2018. China’s Communist Party is set to repeal presidential term limits in a move that would allow Xi Jinping to rule beyond 2023, completing the country’s departure from a political system based on collective leadership. (Bloomberg pic)

BEIJING: China’s banks stand to make higher profits from the government’s move late Tuesday to fine-tune monetary policy by slashing their reserve requirements. Banking shares jumped.

The resulting drop in funding costs will boost the net interest margin of listed Chinese banks by 0.9 basis point and lift their profits by 0.6%, according to analysts at China International Capital Corp.

Industrial & Commercial Bank of China Ltd. gained 2.1% in Hong Kong while China Construction Bank Corp. added 1.75 as of 9.45 am, outperforming the Hang Seng Index.

The People’s Bank of China said it will lower the reserve-requirement ratio on large commercial lenders and some other banks by 1 percentage point, effective April 25.

The move will help banks to repay 900 billion yuan (US$143 billion) of outstanding medium-term lending facility loans they borrowed from the central bank, according to the PBOC.

The move is expected to unleash another 400 billion yuan of liquidity, which can be used to raise lending.

Amid a multi-year effort to cut financial risk and curb credit growth, the PBOC has been adjusting liquidity conditions and guiding market rates higher without raising broader borrowing costs.

Even as the economy is forecast to slow this year, policy makers have given little sign they’re ready to depart from their “prudent and neutral” stance.

Related Institutions
The central bank will require related financial institutions to use most of the additional funding from Tuesday’s move to extend loans to small companies, and to reduce financing costs for such firms.

By the end of 2017, loans to China’s 15 million small and micro enterprises totaled 30.7 trillion yuan, an increase of 15% from a year earlier, according to the banking regulator.

That outpaced the nation’s wider loan growth by 2.7 percentage points. Still, the central bank said such firms are having difficulty accessing funding and their financing costs are high.

And there may be further measures in store to help Chinese banks’ profits. Analysts at Shenwan Hongyuan Group Co. forecast at least three more reserve ratio cuts to help the lenders repay their 4 trillion yuan of outstanding MLFs.

Despite numerous “targeted” RRR cuts since 2016, the reserve ratio of 17% for major banks ahead of Tuesday’s move remained higher than in other major economies.