In another step deregulating its financial markets, China has announced the scrapping of a 20-year old banking law that caps loans-to-deposits at 75%, Bloomberg reports.
While not affecting the reserve requirement ratio, the move has the potential to stimulate credit growth in the country and could prove to be a windfall for the nation’s banks, all of which are forecasted to improve lending margins just through this single amendment.
With its economy in the doldrums, China’s loan cap removal may not be the effective easing measure that some people see it to be.
“The real constraint on bank lending is risk aversion. More aggressive monetary policy easing is still the most effective antidote to the slowdown in lending growth,” Bloomberg quoted Hong Kong-based HSBC economist Qu Hongbin as saying.
Given the timing, the PBOC’s predilection to the nation’s quantity of credit, as well as the looming removal of interest rate caps later this year, those seeing this as an easing measure may have to look elsewhere. But as a play to usher in the swashbuckling, market-based economics that China has been craving for, the move certainly does it.
The market seems to agree, sending the initiative’s biggest beneficiaries – financial stocks – all up amidst a 0.5% decline in the broader Shanghai index.
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