Banks drop on higher reserve requirement

Industrial and Commercial Bank of China Ltd fell to an 11-month low in Shanghai trading, leading banks lower after they were told to set aside more deposits as reserves for a fifth time this year, reducing funds available for lending.

ICBC, the nation's largest bank, fell 8.4 percent to 5.38 yuan, the biggest drop since Jan 22.

China Construction Bank Ltd fell 7.8 percent to 6.43 yuan while Bank of China Ltd dropped 7.9 percent to 4.33 yuan.

Shanghai Pudong Development Bank Co, China Merchants Bank Ltd and six other publicly traded lenders dropped by their 10 percent daily limit.

China's central bank will raise its reserve ratio requirement by a percentage point to a record 17.5 percent by June 25, stepping up a battle to contain lending growth and inflation. The increase will freeze up about 422 billion yuan of funds, equivalent to 91 percent of the value of new yuan-denominated loans extended in April.

"The increase is larger than expected," Li Huiyong, a Shanghai-based economist at Shenyin & Wanguo Research & Consulting Co. "The market is bound to react strongly to this and banks will bear the brunt."

The latest move adds to the 614.7 billion yuan removed from the financial system through reserve ratio increases since January. China's banks had an average excess reserve deposit ratio of 2 percent as of March 31, down from 3.3 percent in December.

The rate that banks charge each other for seven-day loans using bonds as collateral rose to 4.93 percent in Shanghai, the highest since Jan 24, according to China Bond Interbank Market.

The gain suggests banks are hoarding cash in anticipation of further reserve ratio requirement increases.

"This probably suggests that further reserve hikes may start to bite, in particular at the medium and smaller banks," Frank Gong, a Hong Kong-based economist at JPMorgan Chase & Co, wrote in a June 7 report. Gong forecast the reserve ratio will increase to at least 18 percent this year.

Large banks typically have bigger capital cushions, making them less sensitive to changes in the reserve ratio.

Chinese banks earned a record combined profit of 446.7 billion yuan last year. They issued 3.6 trillion yuan of loans in 2007, 16.1 percent more than a year earlier. The government aims to cap the amount of new loans banks issue this year at last year's level.

Every half-point increase in the reserve ratio requirement cuts banks' profits by as much as 1.5 percent, assuming they reduce lending to comply with it, said Li Qing, an analyst at CSC Securities HK Ltd.

Agencies

(China Daily 06/11/2008 page15)