China’s central bank announced a key move Friday to liberalize bank lending rates, underlining the government’s resolve to push market reform to revitalize the slowing economy.
The floor limit for lending interest rates will be canceled and financial institutions can decide their own rates following commercial principles, said a People’s Bank of China (PBOC) statement.
Controls on bill discount rates will be scrapped and the ceiling limit for lending from rural banks will be eliminated. It did remove the ceiling on deposit rates, and retained the lending interest rates for personal homes for the healthy growth of the property market.
Under the previous system, the PBOC set guidelines for lending and deposit rates for commercial banks which were willing to lend to state-backed firms with artificially high rates. Banks are not allowed to lend at rates below 70 percent of the guideline rates. There are no ceilings for deposit rates.
The central bank’s move marks a big step towards market economic reform and indicates the future path for reform, said Yu Yongding, an economist with the Chinese Academy of Social Sciences.
The move is a response to complaints from small and private businesses that have been marginalized by state-backed enterprises and banks due to their monopolistic advantages.
“Lifting controls on lending interest rates can help cut costs for enterprises in raising funds and it can also optimize financial resources to boost the real economy and economic restructuring.” the PBOC statement said.
Scrapping the controls is an important step toward interest rate marketization. However, it is insufficient, as the ceiling limit for deposit interest rates remains unchanged, said Zuo Xiaolei, chief economist at China Galaxy Securities.
The central bank keeps the 110 percent ceiling of guideline rates for deposits which have long been comopained for eating up household saving values and refraining China from developing into a consumption-fue led economy.
“Keeping the ceiling for deposit rates is in consideration of lending rates’ more profound impact[on the economy] which needs more mature conditions,” the central bank statement said.
Globally, liberalizing the lending rates is the most critical and risky part of interest rate market reform. It will be carries out gradually and orderly, the statement said.