China Business Blog - Aggregated China Business Blogs
Aggregated China Business Blogs
China frees banks to set their own lending rates
Aggregated Source: Shanghai Daily: Business

CHINA has ended controls on bank lending rates in a move toward creating a market-oriented financial system to support economic growth.

Banks currently lend mostly to state industry rather than private entrepreneurs who create many new jobs and wealth. Allowing banks to negotiate their own rates with borrowers could channel more credit to private enterprise.

The People's Bank of China said it had decided to fully liberalize lending rates for financial institutions from today.

The move will help lower financial costs for enterprises, improve independent pricing capabilities for financial institutions, and support the country's economic structural adjustment and upgrading, the central bank said.

Removal of the existing lower limit of banks' lending rates, that is 70 percent of the central bank's benchmark rates, leaves commercial banks free to decide what rate to charge their customers.

The lower limit on personal mortgages will remain because of property curbs designed to cool the market.

The announcement followed pledges by Premier Li Keqiang to expand an overhaul of China's interest rate regime. A State Council statement in March after a meeting led by Li said the government would "roll out new measures in promoting interest-rate and exchange-rate liberalization as well as in developing a multilevel capital market this year."

"In the short term, the reform measures will have minor impact on the commercial banking system in general," Ba Shusong, deputy director-general of the Development Research Center under the State Council, said.

"The banks normally gave rate discounts only up to 10 percent even when 20 percent more was allowed," he said. "And only a 10th of lending was extended with discounts."

Li Xunlei, of the Shanghai Finance Institute, also said the move would have limited negative impact on the banks. Given the present liquidity crunch, market rates can hardly move downward, Li said.

China's one-year benchmark lending rate has been held at 6 percent since the last reduction in July 2012.

Mark Williams, chief Asia economist at Capital Economics, called the change a "significant development for China's financial sector." Although in principle more credit-worthy borrowers could now enjoy better rates, "in practice the immediate difference will be small," Williams told AFP.

Bigger firms have already been able to access alternative sources of credit thanks to a fast-growing corporate bond market, he said.

Yin Zhongli, a finance researcher with the Chinese Academy of Social Sciences, said cutting controls on the rates will allow small and medium-sized enterprises to have more access to lending.

Zuo Xiaolei, chief economist at China Galaxy Securities, said scrapping the controls is an important step toward interest rate marketization. However, it was insufficient, as the ceiling limit for deposit interest rates remains unchanged.

The financial institutions will not take solid moves to cut lending interest rates in the short term, Zhou told Xinhua news agency.

There was no word on raising the low rates paid to savers.

Savers who had few alternative places to put their money were paid low rates on deposits that in recent years failed to keep up with inflation, meaning Chinese families lost money by leaving it in the bank.

That has suppressed household spending and held back efforts to shift the basis of China's growth from exports and investment to more self-sustaining domestic consumption.

Chinese families looking for a better return on their savings, have shifted money into more speculative investments in stocks and real estate, helping to fuel a boom in prices of both.

Original URL: Click here to visit original article
Copyright Shanghai Daily: Business