Reserve Requirement Ratio (RRR) Cut Implemented, Credit Still Tight
The total value of imports and exports in January fell by 7.8% year-on-year. The money supply M2 and M1 grew by 12.4% and 3.1% respectively year-on-year, both weaker than the same period in 2011. In January, new RMB loans increased by only 738 billion yuan, and total social financing was nearly halved compared to last year... These data seem to indicate that credit demand is weakening.
However, several people from bank credit departments believe that the strict guidance on the scale of credit and the loan-to-deposit ratio requirements have led to confusion in the market: whether the actual demand from enterprises has really decreased or if effective demand may be suppressed by high funding costs.
In this context, starting from February 24, the central bank officially cut the reserve requirement ratio for deposit-taking financial institutions by 0.5 percentage points, injecting approximately 390 billion yuan into the financial system.
However, this does not mean a shift towards loose policy. Both the loan-to-deposit ratio limit and the window guidance on loan scale will restrict banks' loan supply capacity, thereby effectively limiting this year's new bank credit, especially in platform loans and real estate loans.
Banks: Credit Still Tight
The January financial statistics report from the central bank showed that RMB loans increased by 738.1 billion yuan this year, down by 288.2 billion yuan from the same period last year, significantly lower than the previous market expectation of 1 trillion yuan. A banking industry person said it was due to management level window guidance, forcing banks to compress their credit scale, with end-of-month credit falling below 1 trillion yuan.
At the same time, some people expressed concern: Has the actual demand from enterprises really declined? Is the economy not performing well? Bank credit officers working at the frontlines of the credit market find it difficult to judge: "Because the overall quota is controlled, banks still feel their resources are limited, still consider themselves in a seller's market, and still insist on reaching a certain price before lending. For enterprises, after the regulation in previous years, some may have left, while another part is considering new investments but, seeing the high cost of bank loans, they decide to delay for now. Effective demand may be suppressed by such high-cost funds."
The situation of new credit in January continued into February. There were reports that in the first 19 days of February, the four major banks added less than 100 billion yuan in new credit. Xu Hongtu, deputy general manager of Minsheng Bank Quanzhou branch, believed that cutting the reserve requirement ratio could only solve the problem of funding costs, and its effect on solving loan scale issues was not significant. He stated: "I have never thought that monetary policy is becoming loose, at least I can't see it at this stage." "Fortunately, there are microfinance bonds, which are not included in the loan-to-deposit ratio. Such targeted credit support policies are very necessary," he said.
Frontline credit officers have more personal experiences. A credit officer from Industrial Bank told our newspaper: "After the Spring Festival, enterprises' loan demands are still strong, but banks have many requirements and restrictions on loan interest rates, loan retention, and qualifications. For example, a company borrowing 5 million yuan might need to leave 1 million yuan as a deposit, plus an interest rate 30% higher than the benchmark loan rate."
This has resulted in a lack of enthusiasm among small and medium-sized enterprises to borrow from banks. In fact, currently, apart from slightly relaxing personal mortgage loans, enterprise loans have not been relaxed.
Sun Jianlin, General Manager of the Credit Management Department of CITIC Bank, told our newspaper: "The reason for fewer new loans is twofold: one is the large volume of loans recovered upon maturity, and the other is the small volume of newly issued loans. Private enterprises' borrowing is not substantial, national construction projects still have high demand. This remains the main part, so when new loans decrease, it also reflects the compression of this part. Even with risk mitigation regulatory policies, for banks, good customers get renewed loans, bad ones don't."
The Central Bank's Balancing Act
While lowering the reserve requirement ratio, the central bank continues to conduct window guidance on credit scale, cautiously balancing policy measures.
It is understood that in terms of credit easing, the central bank has always been vigilant. A reduction in new credit compared to the same period last year might be what the central bank wants to see. In the "Fourth Quarter 2011 Monetary Policy Implementation Report", the central bank stated that the effects of a series of macroeconomic policies implemented earlier by the state have gradually become apparent, overall inflation remains under control, but future inflation risks should not be underestimated.
Since the beginning of the year, the central bank has suspended open market operations due to tight liquidity in the money market. From January 17 to 19 before the Spring Festival, reverse repurchase operations were conducted for three consecutive days to release liquidity.
After the Spring Festival, open market operations resumed with small-scale positive repurchases, considered as releasing funds when they matured to alleviate future tightness. Subsequently, liquidity remained tight, and another reverse repurchase operation was conducted on February 17 to release liquidity, followed by another suspension of open market operations.
To further ease liquidity pressure, the central bank cut the reserve requirement ratio starting from February 24, releasing about 390 billion yuan and increasing banks' excess reserves available for lending. This is the second cut in the reserve requirement ratio since December last year. On February 24, the Shanghai Interbank Offered Rate (Shibor) began to fall comprehensively, with the overnight rate dropping by 57.59 basis points to 4.6433%, and the 7-day rate dropping by 100.33 basis points to 4.4817%.
However, according to a banking industry person, Shibor rates had been high previously, reflecting the tightness of bank loans. Although this cut in the reserve requirement ratio released nearly 400 billion yuan in liquidity, spread across over 200 banks, the amount of releasable liquidity is minimal. The "cut" is just a fine-tuning measure, having limited impact on specific loan disbursement volumes by banks.
Yang Aibin, former assistant general manager and head of fixed income at China AMC, and founder of Pengyang Investment Management Co., Ltd., analyzed for our reporter: "Monetary policy definitely should not make a large-scale relaxation at this stage. If we loosen again like in previous years, housing prices and inflation would surely be worse than last year, and systemic risks in the Chinese economy would emerge within three years."
"In fact, from the perspective of bank credit supply, there is a lack of funds for lending. Looking at the structure of loan disbursements, the proportion of long-term loans is decreasing. Long-term loans mainly consist of local government infrastructure loans and real estate loans, both of which are currently strictly restricted by banks. Combined with the generally average performance of other types of enterprises last year, this situation also reflects to some extent a lack of enterprise credit demand," Yang Aibin said.
Citibank's Chief Economist for Greater China Shen Minggao expects that foreign exchange inflows this year will be less than half of last year's. To achieve the central bank's 14% monetary growth target, the reserve requirement ratio will need to be cut at least three more times.
This year, foreign exchange deposits cannot grow as they did in the past, and actual negative interest rates prevent deposit growth from accelerating; with fewer central bank bills expiring in 2012, perhaps the central bank will merely use reductions in the reserve requirement ratio to inject some liquidity into the money market, akin to squeezing toothpaste. Deposit pressures and the upper limit of the loan-to-deposit ratio continue to restrict banks' ability to lend, and expected new capital requirements will also slow banks' expansion of their balance sheets. http://www.wyky.cn/