China Lifts Capital Adequacy Ratios For Banks
Again
In an effort to stem inflation fears, the Chinese government
has again raised capital adequacy ratios again for Chinese
banks. Beginning April 25, Chinese banks will now have
to raise their capital adequacy ratios from the current
7 percent to 7.5 percent. Banks which are considered to
be higher risk will have to raise their capital adequacy
ratios to 8 percent.
The last time the Chinese government raised capital adequacy
ratios was in September
2003 from 6 to 7 percent. The objective then, as now,
is to stem fears of price inflation for commodities and
products. As consumer demand has taken off, China has
suffered from significant shortages of water, electricity,
coal, oil and steel. This has led to price rises in China.
A significant contributing factor has been the fall of
the US dollar in international markets. The Chinese yuan
is fixed to the US dollar at a rate of 8.28 yuan to one
US dollar.
So far, Chinese manufacturers and exporters have not
yet passed the cost increases on to customers in Europe,
Japan and North America, but within the next six months
to one year period, they will have to. This will then
lead to inflation in those countries.
Unlike central bankers in other countries, the Chinese
government is able to exercise control over Chinese banks
with the China
Banking Regulatory Commission and capital adequacy
requirements, instead of just interest rates. This policy
is needed because of many unrecoverable loans made to
other state-owned enterprises by the state-owned banks.
The government has made aggressive moves to stop this
practice, with varying degrees of success. Estimates of
bad loans are very wide, from US$300 - 500 billion.
The capital adequacy requirements will not have a significant
effect on price rises in some sectors, as there has been
significant inflow of capital into China from overseas.
A large amount of this money does not come into the country
through normal banking channels, and is instead repatriated
by Chinese and Taiwan citizens returning to China to work.
Many returnees to China choose to invest their savings
in the country's real-state market, which has driven prices
in Shenzhen, Shanghai and Beijing to new highs.
Most of this money is not returned to the country through
normal banking channels, which means that capital adequacy
ratios have a limited effect. A portion of the repatriated
funds are speculative money, meaning that the returnees
are investing in the property for speculative, in addition
to their own living purposes.
Multinational corporations also will not be significantly
effected, unless they require short-term yuan loans for
business purposes.
The higher capital adequacy ratios will have a greater
effect on local Chinese consumers, who depend on Chinese
banks for home and auto purchase loans.
Before you go, did you like this article?
If so, you can receive a free email newsletter version
each weekday. Sign up using the China Business Express
form on this page.
