China removes 75 per cent cap on loan-to-deposit ratio

Facing economic downturn, China today removed 75 per cent loan-to-deposit ratio stipulation for its commercial banks to improve liquidity and imposed USD 2.5 trillion as ceiling for local governments to control the spiralling debt.
National People's Congress (NPC), China's legislature, adopted an amendment to the Law on Commercial Banks, removing a 75 per cent loan-to-deposit ratio stipulation.
The ratio will instead be regarded as liquidity-monitoring indicator, state-run Xinhua news agency reported.
China has kept the 75 per cent ratio since the law was enacted and put into effect in 1995. The amendment will take effect on October 1.
"The ratio was set to prevent over quick expansion of commercial banks' credit scale and control liquidity risk, but it has become improper for current needs," said Shang Fulin, chairman of the China Banking Regulatory Commission.

In another crucial policy move, the NPC also imposed a ceiling of 16 trillion yuan (USD 2.505 trillion) for local government debt in 2015.

It consists of two parts, 15.4 trillion yuan of debt balance owned by local governments by the end of 2014 and the remaining 0.6 trillion yuan the maximum size of debt local governments are allowed to run up in 2015.
China has struggled for years to rein in local government debt. A huge risk to financial stability, these debts were incurred through unbridled borrowing during the investment and construction binge,following the 2009 global financial crisis.
While debt once helped the prodigious expansion of an investment-based economy, it now appears unsustainable as the growth model is rebalanced toward consumer demand.

There is no official public data on size of the problem, but the NAO estimated direct local government debt at 10.9 trillion yuan (about USD 1.8 trillion) at the end of June 2013, the report said.
A recent NAO survey involving nine provinces, nine cities and nine counties discovered local government debt at the end of last year to have ballooned by 46 per cent from the 2013.
The new measures came as the world's second largest economy deal with growing number of challenges.
Besides the slowdown which is pegged around seven per cent in the first half of this year, China experienced a devastating stock market crash in the last two months leading up to market losses amounting over USD 3.2 trillion.

China also devalued its currency by about four per cent, a move largely interpreted as an attempt to boost sagging export revenues.
An IMF forecast of the Chinese economy said it will grow at 6.8 per cent, lower than the 7 per cent target set by the government.
In its recent World Economic Outlook update, the IMF forecast the Chinese economy to grow 6.3 per cent in 2016 and 6 per cent for 2017.