Bloomberg News

China Said to Consider Relaxing Capital Rules for Banks

February 01, 2012

(Adds banking shares in the sixth paragraph.)

Jan. 19 (Bloomberg) -- China’s banking regulator is weighing a plan to relax capital requirements for lenders after the world’s second-largest economy expanded at the slowest pace in 10 quarters, four people with knowledge of the matter said.

The China Banking Regulatory Commission is delaying implementing the most stringent capital adequacy ratios and may lower risk weightings for loans to small businessmen and companies, the people said, declining to be identified as the matter is confidential. The watchdog may also allow banks to increase the excess bad-loan reserves used in calculating risk buffers, they said.

The proposals signal that China’s policy makers are under pressure to ease credit after economic growth slowed to 8.9 percent in the fourth quarter. The central bank in December cut the reserve requirement for banks for the first time since 2008. Relaxing the capital rules may allow banks to provide more loans without having to raise funds from equity or bond sales.

“Apparently the regulator is concerned about slower growth and now becomes reluctant to constrain banks’ lending capacity by too much,” said Sheng Nan, a Hong Kong-based analyst at CCB International Securities Ltd., the investment banking unit of the nation’s second-largest lender. “This will reduce capital needs for banks and give them more incentive to boost loans to cash-strapped smaller firms.”

Lower Risk Weightings

The risk weighting on personal operating loans given to small businessmen may be cut to 75 percent from the current 100 percent, while the ratio on loans to small and micro-sized firms would be lowered to 50 percent from 75 percent, two of the people said. The banks had 14.6 trillion yuan ($2.3 trillion) of such loans outstanding in August, accounting for 27 percent of total advances, according to the CBRC.

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, rose 1.5 percent in Hong Kong as of 10 a.m. local time. China Construction Bank Corp. gained 2 percent while Agricultural Bank of China Ltd. added 1.4 percent. China Minsheng Banking Corp., which specializes in lending to smaller firms, rose 3.4 percent.

The regulator is yet to complete setting how capital requirements will be calculated, and hasn’t told banks how long the implementation may be delayed, the people said this week.

A press official for the CBRC, who refused to be named due to the agency’s rules, declined to immediately comment.

The regulator also warned banks this month to resist demand for credit from local governments as new officials in cities, towns and villages pursue projects that bolster growth, a person with knowledge of the matter said. Such requests may rise as local leaders appointed in a nationwide shuffle seek funds to help create jobs in their regions, the person said.

Prepared for Slowdown

China is prepared for an economic slowdown and mild moderation is “desirable,” Ma Jiantang, head of the nation’s statistics bureau, said on Jan. 17. Banks including BNP Paribas SA, Nomura Holdings Inc. and UBS AG forecast weaker economic expansion in China this quarter as Europe’s debt crisis curbed export demand and the property market weakened.

Chinese banks advanced 7.47 trillion yuan of new loans in 2011, a decrease of about 5 percent from the year earlier, according to the central bank, after the government tightened monetary policy to cool inflation. The central bank will let the five biggest lenders increase first-quarter lending by a maximum of about 5 percent from a year earlier, two people at state lenders who have knowledge of the matter said this week.

The People’s Bank of China last month allowed lenders to set aside less of their deposits, cutting the reserve ratio by 50 basis points for the biggest banks to 21 percent. New loans in December were also the highest since April, signs that the government is loosening monetary policy to encourage lending.

New Chief Regulator

The proposed changes to the risk buffers also come after China in October named securities regulator Shang Fulin to oversee the $17 trillion banking industry, which includes four of the world’s eight largest lenders by market value. Under former Chairman Liu Mingkang, CBRC tightened rules to prevent a record $2.7 trillion of credit extended in 2009 and 2010 from inflating asset bubbles and saddling lenders with bad loans.

The banking regulator said in August that it would require the country’s largest or so-called systemically important lenders to have a minimum capital adequacy ratio of 11.5 percent by the end of 2013. Smaller banks would be required to have at least 10.5 percent under “normal conditions” by the end of 2016, the CBRC had said.

Basel Rules

That is at least two years earlier than the date of compliance set by the Basel Committee on Banking Supervision, which developed a global regulatory standard on capital adequacy and liquidity of banks. The Basel III rules give the world’s largest lenders until 2019 to increase their core capital ratios to as much as 9.5 percent of risk-weighted assets.

Chinese banks may have to raise about 860 billion yuan in stock over six years to meet the stricter capital rules, a person with knowledge of estimates compiled by the watchdog said in April. Lenders will probably need an additional 1.26 trillion yuan in supplementary capital by the end of 2016, assuming economic growth of 8 percent a year and 15 percent credit expansion, the person said at that time.

--Jun Luo. Editors: Chitra Somayaji, Edward Evans

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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