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China frees up lending rates in major reform

Chinese Yuan

Chinese Yuan

China’s central bank removed controls on bank lending rates, effective Saturday, in a long-awaited move that signals the new leadership’s determination to carry out market-oriented reforms.

The move gives commercial banks the freedom to compete for borrowers, a reform the People’s Bank of China (PBOC) said will help lower financial costs for companies. Previously, the lending floor was 70 percent of the benchmark lending rate.

However, the central bank left a ceiling on deposit rates unchanged at 110 percent of benchmark rates, avoiding for now what many economists see as the most important step Beijing needs to take to free up interest rates.

The latest step underscores Beijing’s resolve to start fixing distortions in its financial system and the economy more broadly as it tries to shift from exports- and investment-led growth to more consumption-led activity.

Some analysts said cheaper credit could help support the economy, which has seen year-on-year growth fall in nine of the last 10 quarters.

“This is a big breakthrough in financial reforms,” said Wang Jun, senior economist at China Centre for International Economic Exchanges (CCIEE), a prominent government think-tank in Beijing.

“Previously, people had thought the central bank would only gradually lower the floor on lending rates. Now they scrapped the floor once and for all.”

The Australian dollar rose modestly on the news on hopes cheaper credit will lead to more demand from Australia’s biggest export market.

The announcement provided some support to weak stock markets in Europe and a timely reminder to the world’s top financial leaders meeting in Moscow of China’s intention to rebalance its economy.

A Group of 20 draft communique will urge China to encourage more domestic demand-driven growth as part of wider efforts to rebalance the world economy, G20 sources said.


China’s big lenders, such as Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd and Agricultural Bank of China Ltd, have generally resisted interest rate reforms because they do not want to see their rate margins get squeezed.

But many economists say such a push is necessary so that lenders learn to better price risk, which will force them to allocate capital more efficiently and so help rebalance an economy that has become saddled with overinvestment and overcapacity in some sectors from cement, to steelmaking to solar panels.

Scrapping the lending floor will likely cut borrowing costs for businesses and individuals, ending what many observers say had been artificially high rates that benefited state lenders at the expense of private enterprise.

Some economists were skeptical at how much direct economic impact the move would have because few banks have fully utilized the limited freedom they already had to charge interest rates slightly below benchmark rates, choosing instead to keep their rates slightly above the floor that has been in place.

“So the move may have more of a signaling effect than transmit immediately to the economy but it is an important signaling effect,” said Manik Narain, emerging market strategist at UBS in London.

However, to the extent that it does lead banks to lower their lending rates, the move could potentially serve to stimulate investment at a time when the world’s second-largest economy is running around its lowest growth rates since 2009 – having logged 7.5 percent growth in the second quarter.

More important, though, is the sign that policymakers are getting serious about tackling challenging reforms, just four months after Premier Li Keqiang took office, analysts said.

“This is one of the biggest steps they could have taken,” said Mark Williams, chief Asia economist at Capital Economics. “It tells you something about the trajectory.”

The need for financial reforms was put on full display in late June, when the central bank attempted to choke off funds flowing to “shadow banking” activities, leading to a crunch in the country’s money markets that sent short-term borrowing rates to levels normally seen only during financial crises, prompting jitters among investors around the world.

The shadow banking sector, or non-bank lending, has ballooned in recent years, raising concerns that authorities are losing track of potential bad debts building in the economy.


The central bank said it is also scrapping controls on rates on discounted bills, a common form of payment among companies.

The PBOC made clear in its statement on Friday that it does not intend to ease up on its controls over mortgage rates. Beijing has been clamping down on the property sector for several years to try to keep a lid on rising prices and speculative buying.

It said it planned to free up deposit rates eventually but now was not the right time. It said it still needed to do more groundwork, which is expected to include launching a deposit insurance system – something many observers expect may happen sometime this year.

“(Reform of deposit rates) is more difficult and more sensitive. We should not expect it to happen very soon,” said Yu Yongding, former member of the central bank’s monetary policy committee and a researcher at the Chinese Academy Of Social Sciences in Beijing.

Beijing worries that allowing banks to raise deposit rates to compete for funds could crush some smaller lenders and force them to go bust.

Longer-term, the latest move could signal that the government will step up other reforms seen as necessary to help rebalance the economy.

“This underlines that China is moving to a fully convertible currency and floating exchange rates,” said Flemming Nielsen, senior analyst at Danske Bank in Copenhagen. “Their next step will be to widen the daily trading band for RMB (yuan). They should do that within the next three months.”

Source: Reuters – “China frees up lending rates in major reform”

About chankaiyee2

Author of the book "Tiananmen's Tremendous Achievements" about how with the help of Tiananmen Protests, talented scholars with moral integrity seized power in the Party and state and brought prosperity to China. The second edition of the book will be published within a few days to mark the 25th anniversary of Tiananmen Protests All the parts in the first edition remain in the second edition with a few changes due to information available later and better understanding. There are also some changes for improvements of style. The new parts are Chapters 12-19 on events in China after the first edition was published: The fierce power struggle for succession between reformists and conservatives; Xi Jinping winning all elders’ support during his mysterious disappearance for 2 weeks in early September, 2012; and Xi Jinping Cyclone. Chan Kai Yee's new book: SPACE ERA STRATEGY: The Way China Beats The US An eye-opening book that tells the truth how the US is losing to China. The US is losing as it adopts the outdated strategy of Air-Sea Battle while China adopts the space era strategy to pursue integrated space and air capabilities: It is losing due to its diplomacy that has given rise to Russian-Chinese alliance. US outdated strategy has enabled China to catch up and surpass the US in key weapons: Hypersonic weapons (HGV) that Pentagon regards as the weapon that will dominate the world in the future. Aerospaceplane in China’s development of space-air bomber that can engage enemy anywhere in the world within an hour and destroy an entire aircraft carrier battle group within minutes. Anti-satellite (ASAT) weapons, anti-ASAT weapons, stealth aircrafts, drones, AEW&C, etc. The book gives detailed descriptions of China’s weapon development based on information mainly from Chinese sources that the author monitors closely. U.S. Must Not Be Beaten by China! China is not a democracy. Its political system cannot prevent the emergence of a despotic leader or stop such a leader when he begins to bring disasters to people. A few decades ago, Mao Zedong, the worst tyrant in world history did emerge and bring disasters to Chinese people. He wanted to fight a nuclear war to replace capitalism with communism but could not bring nuclear holocaust to world people as China was too weak and poor at that time. If a despot like Mao Zedong emerges when China has surpassed the US in military strength, world people will suffer the misery experienced by Chinese people in Mao era. China surpassing the US in GDP is not something to worry about as China has the heavy burden to satisfy its huge population, but China surpassing the US in military strength will be world people’s greatest concern if China remains an autocracy. US people are of much better quality than Chinese people. What they lack is a wise leader to adopt the correct strategy and diplomacy and the creative ways to use its resources in developing its military capabilities. I hope that with the emergence of a great leader, the US can put an end to its decline and remain number one in the world. China, US, space era strategy, air-sea battle, space-air bomber, arms race, weapon development, chan kai yee


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