China eases rules for banks' loan-to-deposit ratio in latest stimulus move

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China is relaxing the rules used for calculating the amount of deposits that banks can re-lend as loans, an attempt hailed by some economists as the latest move to stimulate growth in its cooling economy.

As of July 1, selected loans to small firms and the farm sector will be excluded from the computation of banks' loan-to-deposit ratio (LDR), the China Banking Regulatory Commission said in a statement on its website.

The definition of deposits will also be broadened to include items such as large negotiable certificates of deposit issued by banks to companies and savers, the regulator said.

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The new LDR calculation will only cover loans and deposits denominated in yuan, while lending and borrowing made in foreign currencies will be kept out.

By increasing banks' deposit base and removing some loans from the calculation, China is making the LDR less onerous on banks and allowing them to re-issue more of their deposits as loans.

The hope is that the freed-up funds will make their way through the economy to companies with real financing needs, thereby lifting growth in the world's second-largest economy.

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"This is another 'targeted stimulus' policy conducted by the Chinese authorities to help the economy regain momentum in the next few quarters," ANZ economists Liu Li-Gang and Zhou Hao said in a note.

As a result, total lending by Chinese banks is likely to be "significantly bigger" from the same period last year, they said.

Chinese laws cap banks' loan-to-deposit ratios at 75 percent, which means banks can lend no more than three quarters of their deposits.

To meet the loan-to-deposit requirement, banks often demand more cash at the end of each quarter and year so that they can attract more deposits and dress up their quarterly financial statements.

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The average LDR for Chinese banks stood at 65.9 percent at the end of the first quarter, the regulator said.

The regulator said it would work with China's legislators to quicken the revision of the commercial banking law, which many believe would lead to an eventual scrapping of the loan-to-deposit ceiling for banks.

Relaxing the definition

Hurt by unsteady global demand for its exports and moderating domestic investment growth, China's economic growth slipped to an 18-month low of 7.4 percent between January and March.

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Although authorities said earlier this year that it was alright if annual economic growth for 2014 slightly missed the government's target of 7.5 percent, Premier Li Keqiang said in London earlier this month that 7.5 percent was a minimum requirement that would be met.

As a result, some economists expect China's government to further loosen the monetary and fiscal policies in coming months to boost activity.

Under the new rules announced on Monday, money commercial banks received from the central bank under its "re-lending" program, and which was lent to small firms and the farm sector will not be included in LDR computations.

Loans funded by bonds sold by banks with remaining maturities of at least a year, and which bond investors have no right to demand early repayments, can also be omitted from LDR calculations.

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Lastly, loans funded by international financial institutions or foreign governments will be dropped from the ratio as well.

As for deposits, those transferred to the local branches of foreign banks from their parent companies with maturities of over a year can also be included in the LDR.

Despite the changes, the regulator did not go as far as some had hoped in revising the rules.

Some investors had speculated that China would broaden its definition of deposits to include interbank loans when calculating the ratio.

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But that change was rejected by the regulator as it felt interbank loans are not a steady form of income and should not be included in the computation of the loan-to-deposit ratio, said a source with knowledge of the matter.

The source declined to be named as she is not authorized to speak to the media.