By Wei Hongxu*
On April 13, the executive meeting of China’s State Council proposed a specific policy to facilitate further monetary policy easing. This includes encouraging the country’s major banks with higher levels of provisioning to lower their provisioning rates in an orderly manner, timely use of reserve requirement ratio reduction (RRR reduction) and other monetary policy, as well as encouraging banks to strengthen their credit capacity. . The orientation of this policy implies that the country’s monetary policy will continue to expand the scale of credit in its entirety, depending on the situation of each bank. On the fundamental principle of stabilizing monetary policy, the central bank has implemented a reduction in the RRR on numerous occasions, maintaining a moderately relaxed fluidity condition. Nevertheless, the frequent implementation of the overall RRR reduction policy has brought about not only the monetary transmission problem of “monetary easing” and “broad credit”, but also the increasingly delicate situations of bearing base currency delivery function. Meanwhile, the function of reducing the RRR is reduced to more than preventing the tightening of monetary policy, with increasingly weakened results in promoting easing. The proposed policy for large banks to lower provisioning rates, which the Council of State proposed at the same time as the proposal to reduce the RRR, faces even more complex situations.
Regarding the next step in the implementation of the aggregate monetary policy tool, ANBOUND researchers are of the opinion that in using this tool to achieve precise control, it is imperative to overcome many contradictions, fully aware of the complexity of the process.
From the point of view of risk prevention, the feasibility of reducing the coverage of the provisions of the large banks is the subject of constant debate. As a preventive measure against financial risks, the financial supervision and regulation department has mandated the banks to proceed with the provision of credit assets. In order to assess the sufficiency of preparedness of commercial banks against loan losses, the banking regulator currently has a set of indices for credit provision rate and provision coverage. The base standards for the first and second are 1.5% – 2.5% and 120% – 150% respectively. As Mr. Sun Tianqi, head of the Financial Stability Board of the PBoC, pointed out, the level of commercial bank lending in China is significantly higher than the international level. The credit coverage of public commercial banks is 225.33% and that of joint-stock banks is 208.41%. In terms of overall credit coverage, it is 245.7% in the case of US G-SIBS and 67.6% in the case of European G-SIBS. Opinions differ that commercial banks in China need better risk resilience, as these banks are less proficient in risk management, in addition to having a relatively high level of non-performing assets.
In terms of financial risk prevention policy objectives, the economic downturn coupled with the impacts of the COVID-19 pandemic over the past few years has seen a relatively large number of banks independently increase their provisioning strength, with an increase consequence of the coverage of the provisions. There was an increase in the individual provision coverage of the Big Six banks in 2021, with each bank having recorded provision coverage of more than 150% by the end of the year. Of the six banks, Postal Savings Bank of China and Bank of Communications posted the highest and lowest provision coverage of 418.61% and 166.50% respectively. In the case of the latter bank, there was an increase of 22.63 percentage points compared to the end of 2020. The Industrial and Commercial Bank of China posted a provision balance above 600 billion RMB, and the first return to provision coverage beyond 200% in 7 years – at 205.84%, an increase of 25.16 percentage points from 2020 year-end. With a provision balance of RMB 700 billion, the Agricultural Bank of China saw its provision coverage increase by 33.53 percentage points from that at the end of 2020 to 299.73%. Like the big banks, a relatively large number of small and medium-sized banks showed high provision coverage. According to the data, at the end of fiscal 2021, the provision coverage of each of the following banks exceeded 400%: Changshu Rural Commercial Bank; Bank of Ningbo; Merchants Bank of China; Zhangjiagang Rural Commercial Bank; and Bank of Suzhou. The banks that showed provision coverage above 300% are Xiamen Bank; Rural Commercial Bank; Jiangyin Rural Commercial Bank; and Bank of Jiangsu. Some scholars have argued, from a conservative macro and prudential perspective, that banks should capitalize on the existing situation which is beneficial for profit making, to do more in terms of provisioning and additional capital, in anticipation of any future financial risk. From the perspective of individual bank development and operations, by planning ahead during the economic downturn, banks will be able to establish and strengthen public confidence in them.
Opinions differ on the banks’ decision to increase the level of provisioning. Many in the market view this move by large and medium-sized banks as a “hidden profit” instrument in the current circumstances. In recent years, with the policy forcing commercial banks to increase credit as a form of supporting the economy, many large and medium banks have witnessed an increase in the size of their assets and profits. This situation of banks providing too high a level of provisioning has drawn criticism and skepticism, where the banking sector is seen as profiteering and having a negative impact on economic development. This line of thinking perhaps forms part of the backdrop for the establishment of the policy concerned.
There are two sides to the implication of lowering banks’ provisioning levels. On the one hand, such a measure allows the expansion of leverage and credit size. On the other hand, risk resistance may decrease. For the financial market as a whole, encouraging banks to voluntarily lower the provisioning rate is useful to achieve the effects of indirect PPP reduction. In the short term, this leads to an expansion of the credit scale and increased capital efficiency in the liquidity environment. In the long term, however, there are underlying concerns about the measure, especially when the economic environment is not favorable, and if the quality of new credit assets is not well controlled. The scenario is one where there would be accumulated non-performing assets, increased banking risks and inherent threats to long-term financial stability. In relation to the effects of PPP reduction, expanding the scale of credit by promoting self-adjustment on the part of banking institutions implies an imperative: that banks and financial institutions should explore their potential, to improve their efficiency, asset structure and management. The desired results are not easily achievable in the short term. In such circumstances, the decline in the provision rate forces individual banks to face their specific conditions and to have leeway to adopt measures in line with their respective situations. This indicates that it is not possible to adopt a unified and mandatory provision reduction measure. The future implication is twofold. First: large and medium-sized commercial banks should operate according to their individual advantages and operational needs while maintaining room for negotiation with the central bank. Second: the effects of the existing introductory policy will be significantly reduced.
In the unfavorable economic and credit environment conditions, banks actually lack initiatives to increase credit. Whether it is a reduction in PPPs or a reduction in the provisioning rate, it is necessary for banks to overcome the contradiction between the credit crunch and monetary easing. As for the realization of “individual” monetary policy, the fact remains that banks must take into account the complexities involved in the implementation process. There is also a need to integrate and coordinate structural and comprehensive policies, as a systemic and loose way to support the economy.
*Wei Hongxu, ANBOUND researcher, graduate of Peking University School of Mathematics and PhD in Economics from University of Birmingham, UK