China is tinkering while driving.
In the latest mini-stimulus effort, Chinese regulators this week rejiggered the way banks' loan-to-deposit ratios are calculated, pumping a bit more credit into the system while trying to accomplish financial-sector reform along the way.
As a broad prudential measure Chinese banks can't lend more than 75% of the value of their deposits. Beijing basically tweaked the definition of loans and deposits to free up more cash to lend against. Certain loans to small-and-medium enterprises, loans funded by bonds, and foreign currency loans will be exempt under the new rules. And new kinds of deposits will qualify for the ratio's denominator.
Some of that moves the system toward reform objectives such as channeling new credit away from unproductive state-owned enterprises toward small private businesses and developing the immature bond market.
The simulative impact won't be huge. Bank of America-Merrill Lynch estimates that around one trillion yuan ($161.3 billion) of loans will be made exempt from ratio calculations. It is unclear how much space that will give banks to generate new loans.
But it fits with other recent measures, such as reductions in banks' reserve requirements, conditional on lending to small businesses and the rural sector. The idea is that China needs some stimulus especially as property prices decline. But opening credit taps wide would undermine oft-stated goals to wean the economy off excessive debt and over investment. Wrapping a bit of stimulus with lending reform makes the medicine go down easier for Beijing's political factions.
China's largest banks are generally well below the regulatory ceiling, a function of large deposit bases, and undisclosed lending quotas imposed by the central bank. Smaller lenders should see more benefits. Banks don't all disclose precise regulatory loan-to-deposit ratios, nor are the regulator's calculation methods public, but according to analyst estimates some midsize lenders such as China Merchants Bank 600036.SH +0.29% were even slightly above the 75% threshold at the end of last year.
These banks are squeezed at the end of each quarter when their ratios are checked, forcing a scramble for deposits and contributing to China's periodic interbank credit squeezes.
It is healthy to get banks out of problem sectors. However shifting regulatory goal posts will do little to assuage investor worries that the loan books of China's banks are in worse shape than reported, the main reason bank shares have been so battered. Nor does the government directing loans to specific areas improve market-based decision making.
That leaves investors still evaluating China's banks based on Beijing's policies rather than fundamentals. And for the broader economy, it still amounts to propping up growth with more bank credit. Chinese policy makers haven't figured out another way to do it.