China’s central bank has changed its stance on interest
rates and will allow lenders more freedom on setting rates in a move that may
spark big changes to the country’s banking sector.
Previously, the central bank set a lower limit for interest rates
on loans giving banks little autonomy in decision-making about rates. The lower
limit was set at 70 percent of the benchmark rate set by the central bank. By
removing the floor, borrowing costs should drop over time. But for now, few banks
are expected to make loans below the benchmark rate.
The move is seen as a sign that Beijing is trying to reform
its financial system even at the cost of economic growth. Many feel that by providing more competitive
interest rates, China should see a more efficient banking sector along with the
benefits of a more open economy. Rate liberalization is the first step in this
process and will likely bring more investment to the area.
step toward interest rate liberalization, experts said, would be a loosening or
elimination of artificial deposit rate ceilings. Deposit rates have been set so
low that for several years Chinese savers have been earning negative interest
when adjusted for inflation.
think the elimination of deposit rate ceilings would encourage smaller banks to
raise interest rates in an effort to attract more customers. No indication has
been given by the central bank that deposit ceilings will be eliminated any
Credit Suisse economists, rate competition "would increase the yield of
deposit rates and shrink the margins of large banks." This could have a
significant impact on “wealth management products and the corporate bond
Removing the deposit cap would also help to slow
down the “shadow banking” system that has lured investors seeking higher yields
than offered by the major commercial banks. Shadow banks have flourished by
offering loans to small- and mid-sized businesses that are packaged and sold to
investors looking for high returns. By allowing banks to set their own rates,
the hope is that these small- and mid-size business loans would no longer be
ignored and the business owners could get competitive loans.