More Reserve Requirements for China Banks

by: Emerging Money

Once again, the People's Bank of China is telling banks to move more money into their reserves in order to curb lending and, it is hoped, keep inflation under control in the fast-growing economy.

As of December 20th, local lenders need to allocate another 50 basis points (0.50%) of their funds to central bank reserves. This means that the biggest banks like China Construction Bank (OTCPK:CICHY), Industrial & Commercial Bank of China (OTCPK:IDCBF), and Bank of China (OTCPK:BACHY) will need to tie up 18.5% of their assets -- roughly $2 trillion -- in order to comply.

As recently as mid-September, the reserve requirement was running at only 11.5% of assets, which means that Chinese banks that have already exhausted their near-term resources may need to raise new capital -- possibly as much as $53 billion -- to gather the cash to meet the new requirement's tight deadline.

In any event, Beijing's goal is to get these banks to curtail their lending activities at once. Although previous sources indicated that new lending had completely tapered off as the end of the year approached, new numbers reveal that $85 billion in yuan-denominated loans are still being made in November, far more than the $74 billion in new loans economists had expected.

The good news is that the entire Chinese banking system is legally allowed to only borrow another $8 billion in December before quotas reset January 1. By that point, CICHY.PK and the rest should have their reserves in place.

With inflation numbers due over the weekend, an interest rate increase could be in store as well. This would provide some consolation to Chinese banks as their reserves and existing variable-rate loans would perform somewhat better, while further curbing consumer appetite for new credit.

Yuan futures gained ground on the news, thanks to traders betting that higher rates will boost the Chinese currency by about 2% next year. This will be good for yuan ETFs like CYB:

Disclosure: No positions