China loosens requirements for loan-to-deposit ratio

BEIJING - China's banking regulator is relaxing the rules for the calculation of banks' loan-to-deposit ratio in a bid to release more cash into the system to support the real economy.

As of July 1, selected loans to small firms and the farm sector will be excluded in the computation of banks' loan-to-deposit ratio, 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, the regulator said.

The amendments will allow banks to re-lend more of their deposits, which could help shore up activity in China's cooling economy.

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.

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.

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 authorised to speak to the media.