Caixin Explains The New Deposit Rule

Caixin Explains: New Rules for Bank Deposits
Will the policy encourage banks to increase their lending?
Theoretically, yes. Banks are required by law to cap their lending at 75 percent of client deposits, excluding interbank deposits. Some analysts have argued that if the restriction were eased, banks would have more money to lend. Although the policy does not change this restriction, it will effectively cut the ratios for banks by 5 percentage points on average, according to Haitong Securities.

Critics have noted, however, that the biggest problem standing in the way of more bank lending is on the demand side. Many companies currently are having trouble borrowing from banks because they can't meet loan requirements, they argue. And easing lending restrictions on banks is not expected to offer much help.

The Chinese banking system is not efficient at capital allocation. The rebalancing is away from the companies who can easily borrow from banks and towards those who cannot. This is the impetus for financial reform, and also why these types of easing moves will have limited effects so long as they remain restrained.

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