China Removes Floor on Lending Rates as Economy Slows

China eliminated the lower limit on lending rates offered by the nation’s financial institutions as growth slows and authorities expand the role of markets in the world’s second-biggest economy.

The change, effective today, removes a floor set at 30 percent below the current 6 percent benchmark, according to a People’s Bank of China statement yesterday

While the move temporarily jolted world stocks higher, the PBOC acknowledged that it was a limited step and said that freeing up deposit rates would be more important. The shift came as central bankers and finance ministers from Group of 20 nations gathered in Moscow, and after a cash squeeze in money markets curbed a record expansion in China’s credit.

“While deposit-rate liberalization is still possible, the fact that a decision was made to just remove the lending-rate floor suggests that more aggressive liberalization proposals were defeated, or at least delayed,” said Ken Peng, senior economist at BNP Paribas SA in Beijing. “This decision shows that some reform is being done, but may actually reduce the chances for deposit-rate liberalization in the near term.”

Raising the deposit-rate ceiling would improve household incomes and reduce the attractiveness of non-traditional wealth management products while threatening banks’ profit margins, Peng said.

China is not yet ready for freeing up deposit rates, the “most risky” part of interest-rate liberalization, the PBOC said, adding that the nation lacks a deposit insurance system.
Right Timing

There’s no consensus on deposit-rate reform, Song Guoqing, an academic adviser to the central bank, said today.

“Some people said the timing is right, others said it’s not, there is no unified view,” Song said at a conference in Beijing. “Had there been a unified view, it would have been announced yesterday.”

The change will lower companies’ funding costs and boost financial institutions’ pricing capabilities, the PBOC said. In the first quarter, only about 11 percent of loans were priced below the lending benchmark, according to central bank data.

China will maintain the floor for mortgage rates because the government will continue to curb speculative home buying and investment, the PBOC said. It will remove the cap on lending rates offered by rural cooperatives and also scrap controls on bill discounting rates.

http://www.bloomberg.com/news/2013-07-19/china-removes-floor-on-lending-rates-offered-by-nation-s-banks.html