Gradual decline of M2 possible consequence of Doc. 236 implementation

Also, tighter but smoother liquidation.

The CBRC, MOF and PBOC have introduced new prudential regulatory measures of deposit deviation to prevent banks from aggressively growing deposits at month/quarter-end period.

According to a research note from Barclays, although the time of implementation is not mentioned by the regulators, it is expected that banks to be given a grace period within which time they can comply.

As a consequence, Barclays expects deposit growth at quarter-end to gradually slow down, which could lead to a decline in M2 by 4-8% (or RMB 5-10tn) through time according to our estimates.

Here’s more from Barclays:

If this is the case, the market could take it negatively as concerns over inadequate liquidity may arise, in our view.

Furthermore, we expect banks’ lending capabilities to be moderately reduced due to LDR constraints, especially for mid-sized banks (e.g. BOCOM and CMB) whose daily average LDR are noticeably higher than peers and the 75% LDR requirement.

Moreover, the new rules could prompt banks to focus on growing stable core deposits (e.g. time deposits) and smoothing out the maturities of their wealth management products, though their NIM may not be severely affected as they could pass on a higher funding cost to borrowers.

We believe this deviation cap will tighten market liquidity, and thus is negative for the stock market.

However, we expect interbank interest rates to be less volatile in the future, which is positive for the long-term healthy development of the financial system.