Bank lending under pressure from new deposit rules

New rules requiring banks to ensure that deposits at the end of each month deviate by no more than 3% from the monthly average are a new headwind for China’s economy. The rules are designed to prevent banks from temporarily inflating deposit numbers to meet end-month regulatory limits, which they most commonly do by designing wealth management products to mature at that time. They already appear to be having an effect. Last month’s increase in deposits was noticeably smaller than in previous Septembers. (See Chart below.) With banks now less able to window-dress their deposit figures, some will be forced to scale back lending to meet loan-to-deposit requirements.