The latest one-percentage point rise in the reserve requirement ratio has left domestic banks short of cash to lend. The banking sector expects fewer loans in the second half of the year, according to a recent report by China Securities Journal.

Tightening credit may add to default risks

The further hike in reserve requirement ratio means commercial banks have to set aside more deposits as reserves and cut lending capitals.

"Due to ample capitals in the first quarter, our bank has reached lending agreements with many clients. However, given relatively tight conditions currently, we have no choice but to suspend most projects," the newspaper quoted a bank credit manager as saying. "Some companies depend heavily on bank loans. If they cannot get renewals after old loans mature, they may face a breakdown in the fund chain, which may lead to more defaults or even bad loans."

According to banking analysts, credit growth continued to rise last month due to reconstruction costs following the May 12 earthquake. However, commercial banks used up over 59 percent of the whole year's credit quota in just the first five months. Banking insiders therefore expect fewer loans in the second half.

Alternative profit source

However, consecutive ratio hikes and suspension of large credit projects to a large extent haven't cut into banks' funding sources. Statistics show that outstanding deposits at some large commercial banks nonetheless grew rapidly this year. Therefore, banks have to seek other ways to make profit with their savings.

"Bonds and mid-term bills are very good investment targets," said a manager with a bank's cash trading department. "Currently, commercial loans accounts for a large proportion of banks' capital available, and a limit on loans will surely affect interest income. However, banks could shift to other fields like the bond market to cover their interest expenditures and boost profits."

As a matter of fact, many banks have already put more emphasis on bond investment, especially corporations' mid-term bills, according to the source.

(Chinadaily.com.cn June 23, 2008)