On April 13, China’s State Council Executive Meeting proposed a specific policy aimed at facilitating further easing of the monetary policy. This involves encouraging major banks of the country with higher provision levels to lower their provision rates in an orderly manner, timely use of reserve requirement ratio cut (RRR cut) and other monetary policy tools, as well as driving the banks to strengthen their credit capacities. The orientation of this policy implies that the country’s monetary policy will continue to enlarge the credit scale in totality, based on individual banks’ situations. On the fundamental of stabilizing the monetary policy, the central bank had implemented RRR cut on numerous occasions, maintaining a condition of moderately loose fluidity. Nevertheless, frequent implementation of the policy of comprehensive RRR cut has resulted in not only the monetary transmission problem of “monetary easing” and “wide credit”, but also the increasingly awkward situations of bearing the base currency delivery function. Meanwhile, the function of RRR cut is reduced to more of preventing the tightening of monetary policy, with increasingly weakened outcome in promoting easing. The proposed policy for major banks to lower provision rates, which the State Council put forward concurrently with the proposed RRR cut, is faced with even more complex situations.
As regards the next stage in implementing the aggregate tool of monetary policy, researchers at ANBOUND are of the view that, in using this tool to achieve precise control, it is imperative to overcome many contradictions, with full cognizance of the complexity of the process.
From the perspective of risk prevention, there are constant disputes as to the feasibility of lowering big banks’ provision coverage. As its preventive measure against financial risks, the financial supervision and regulator dpartment has mandated that banks carry out credit assets provision. As a means of evaluating the sufficiency of commercial banks’ preparedness against loan loss, at present, the banking regulatory body has a set of indices for credit provision rate and provision coverage. The basic standards for the former and the latter are 1.5% – 2.5% and 120%- 150% respectively. As highlighted by Mr. Sun Tianqi, head of the Financial Stability Board of the PBoC, the level of credit provision of commercial banks in China are clearly above international level. The credit coverage of state-owned 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 American G-SIBS, and 67.6% in the case of European G-SIBS. There are differing views which claim that commercial banks in China require improved risk resistance, as these banks are less proficient in risk management, besides having a relatively high level of non-performing assets.
In terms of the objectives of financial risk prevention policy, the economic downturn coupled with the impacts of COVID-19 pandemic in the past few years have seen a relatively large number of banks independently increase their provision accrual strength, with consequent increase in provision coverage. There was an increase in the six major banks’ individual provision coverage in 2021, whereby each bank registered provision coverage of more than 150% by the end of the financial year. Of the six banks, the Postal Savings Bank of China and the Bank of Communications posted the highest and the lowest provision coverage of 418.61% and 166.50% respectively. In the case of the latter bank, there was a 22.63 percentage point increase compared to 2020 year-end. The Industrial and Commercial Bank of China posted a provision balance exceeding RMB 600 billion, and the first-time return to a provision coverage beyond 200% in 7 years – at 205.84%, which is an increase of 25.16 percentage point compared to 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 point from that of 2020 year-end to 299.73%. Just as the big banks, a relatively large number of small- and medium-sized banks posted high provision coverage. According to data, as of end of the financial year 2021, the provision coverage of each of the following banks exceeded 400%: Changshu Rural Commercial Bank; Bank of Ningbo; China Merchants Bank; Zhangjiagang Rural Commercial Bank; and Bank of Suzhou. Banks that posted provision coverage exceeding 300% are Xiamen Bank; Rural Commercial Bank; Jiangyin Rural Commercial Bank; and Bank of Jiangsu. Some scholars opined, from conservatively macro and supervisory perspectives, that banks should capitalize on the existing situation that is beneficial to profit-making, to do more in terms of provision and supplementary capital, in preparation for any future financial risks. From the perspective of individual banks’ development and operations, by planning ahead during economic downturn, banks will be able to establish and boost public confidence in them.
There are varied opinions concerning banks’ move to increase provision level. Many in the market view this measure taken by the big and medium-sized banks as an instrument for “hidden profits” under the current circumstances. In recent years, with the policy requires commercial banks to expand credits as a form of support for the economy, many major and medium-sized banks have witnessed enlargement of their asset size and profits. This situation of banks providing overly high level of provision has attracted criticisms and skepticism, where the banking industry is seen as profiteering and negatively impacting economic development. This line of opinion perhaps constitutes part of the background to the introduction of the policy concerned.
There are two sides to the implication of banks’ lowering of provision level. On the one hand, such measure allows for expansion of leverage size and credit. On the other hand, there is the possibility for risk resistance to decline. For the overall financial market, encouraging banks to voluntarily lower the provision rate is helpful for accomplishing the effects of indirect PPP cut. In the short term, this leads to expansion of credit scale and enhanced capital efficiency within the liquidity environment. In the long term, however, the measure poses underlying concerns, especially when the economic environment is not conducive, and if the quality of the new credit assets is not well-controlled. The scenario is one where there would be cumulative non-performing assets, increased banking risks and inherent threats to long-term financial stability. As compared to the effects of PPP cut, expanding credit scale through the promotion of self-adjustment on the part of banking institutions implies an imperative: that banks and financial institutions alike must explore their potential, for enhancement in their efficiency, asset structure, and management. The desirable outcomes are not easily achievable in the short term. Under such circumstances, lowering the provision rate requires individual banks to confront their specific conditions and be allowed room to adopt measures that are in line with their respective situations. This indicates that it is not feasible to adopt a unified, mandatory provision-reduction measure. The future implication is twofold. First: big and medium-sized commercial banks are anticipated to operate based on their individual benefits and operational needs while maintaining room for negotiation with the central bank. Second: the effects of the existing introductory policy will be greatly reduced.
Under the untoward conditions of the economic and credit environments, banks effectively lack initiatives to expand credits. Whether it is PPP cut or lowering provision rate, it is necessary for banks to overcome the contradiction between credit crunch and monetary easing. As for realization of the “individually-based” monetary policy, there remains the need for banks to consider the complexities involved in the implementation process. There is also the need to integrate and coordinate between the structural and aggregate policies, as a systemic, loose means of supporting the economy.