The Shanghai Composite lost 3.4 per cent — continuing its remarkable volatility of recent weeks — despite Beijing’s announcement that it would scrap the country’s limit on bank lending, a move that may ultimately help China’s banking sector respond more quickly to changes in monetary policy.
The State Council passed a draft amendment on Wednesday night removing China’s longstanding loan-to-deposit ratio of 75 per cent. The move, part of a broad push to modernise the country’s regulatory framework, should help reduce banks’ administrative burden but overall, analysts did not foresee an immediate impact on market liquidity.
HSBC chief China economist Qu Hongbin noted that the change should help reduce deposit competition among banks, “which has in the past caused large seasonal distortions to money supply. In this process it will also help to reduce the upward pressures on banks’ funding cost and improve the efficiency of the monetary transmission mechanism.”