Loosening credit standards is an odd way to deflate a credit bubble. But China’s credit market is particularly scary because of its shadow banking system. A change that lets banks lend more could allow sunshine in.
Late on Wednesday, China’s State Council said that it plans to remove the upper limit on banks’ loan to deposit ratio (LDR). Current rules stop banks from lending once loans reach 75 per cent of the deposit base. Removal of this cap should mean more loans. But most estimates find that the system’s average LDR is between 66 and 72 per cent. So credit has not necessarily been constrained by this policy alone. Slowing economic activity has crimped demand; loan quotas and banks’ risk aversion have capped supply.
The announcement is meaningful all the same. Analysts estimate that some banks’ LDRs — including BOCOM and China Merchants Bank