Big Relief For China's Small Banks

NOVEMBER 15, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

Is the People's Bank of China providing some relief for cash-strapped smaller banks?

So much happens under the surface that it is difficult to say for sure. But there are tantalizing suggestions that the answer is yes.

Back in August, the People's Bank of China introduced new rules requiring the banks to add around 890 billion yuan ($140 billion) to reserves at the central bank, with installments spread over six months.

Yet the data for September—the latest available—show that for China's small and medium banks, reserves actually fell. The ratio of reserves to deposits for smaller banks also dipped, down to 17.8% from 18% in August, some way below the 19.5% that is ostensibly the regulated minimum.

That suggests for China Minsheng Bank,Shanghai Pudong Development Bank and others that together accounted for a third of new loans in the first three quarters, the new rules may have been relaxed even before they really came into effect.

Further evidence, the loan-to-deposit ratio has started to creep up. China's banks are supposed to maintain a loan-to-deposit ratio of 75%—part of the regulator's efforts to prevent lending running out of control. In fact, the loan-to-deposit ratio for small banks hit 83% in September from 81% in June, suggesting the restrictions have been allowed to slide.

That might explain why short-term interest rates in China's interbank market have been relatively subdued. Leaving aside a month-end peak, one-week interbank rates have been stable below 3.5% for the last two months. It's China's smaller banks, with a weaker deposit base, that are the main buyers in the money market. Stable rates suggest they are not scrambling for cash.

The stage is set for a further uptick in lending in the final months of the year. The impact will be partially offset by the contraction in off balance sheet lending, which fell sharply in the third quarter. But behind the scenes, China is shifting policy to support growth.

Write to Tom Orlik at Thomas.orlik@wsj.com