China to remove floor on lending rates offered by its financial institutions as part of effort to allow banks more freedom to set borrowing costs, effective July 20; People's Bank of China concedes liberalization of deposit rates would be a bigger step

Cindy Allen

Cindy Allen

Jul 19, 2013 – Bloomberg LP

July 19, 2013 () – China will remove the floor on lending rates offered by the nation’s financial institutions as economic growth slows and authorities push forward with measures giving its banks more freedom to set borrowing costs. The People’s Bank of China will also remove the cap on lending rates offered by rural cooperatives, the central bank said in a statement on its website today. The actions are effective tomorrow.

While the move temporarily jolted world stocks higher, the PBOC itself acknowledged that it was a limited step, and that the liberalization of deposit rates would be more important. The shift came just as central bankers and finance ministers from Group of 20 nations gather for meetings in Moscow.

“Most observers would be disappointed to find out that it was only the removal of the lending rate floor,” said Ken Peng, senior economist at BNP Paribas SA in Beijing.

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. “This decision shows that some reform is being done, but may actually reduce the chances for deposit-rate liberalization in the near term,” he said.


Li’s Pledges


The MSCI World Index of stocks reversed losses after the announcement, then pared gains and was little changed as of 8:43 a.m. New York time.

Today’s announcement builds on pledges by Premier Li Keqiang to expand an overhaul of interest rates, a development the World Bank says must be a priority in reform of the financial system. China’s one-year benchmark lending rate has been held at 6 percent since the last reduction in July 2012.

The PBOC last year allowed banks to offer rates as much as 10 percent above the benchmark set for deposits and let financial institutions offer loans at a discount of 30 percent below the benchmark lending rate.

A majority of analysts surveyed by Bloomberg News in March projected China this year would relax or remove the cap on deposit rates or the floor on lending rates.

A State Council statement in March after a meeting led by Premier Li said the government this year would “roll out new measures in promoting interest-rate and exchange-rate liberalization as well as in developing a multilevel capital market.”

PBOC Governor Zhou Xiaochuan, who was reappointed in March after a record tenure of 10 years in the job, said in November that changes to the interest-rate system should be made at a “moderate” pace.




--Aipeng Soo, with assistance from Stephen Tan and William Bi in Beijing and Alfred Cang and Jing Jin in Shanghai. Editors: Scott Lanman, John Liu


To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net


To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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