Beijing likely to free up interest rates this year

PUBLISHED : Tuesday, 22 May, 2012, 12:00am
UPDATED : Tuesday, 22 May, 2012, 12:00am


The mainland is likely to make a breakthrough in liberalising interest rates this year, with Beijing expected to allow banks to set rates within widened bands.

Academics close to policymakers said the progress in deregulation would allow interest rates to better reflect market supply and demand and thus squeeze the huge net interest margins of banks.

The People's Bank of China (PBOC) said in January that it would 'actively' push forward with the liberalisation of interest rates this year, as conditions were ripe for it.

Li Daokui, a former adviser to the central bank, said at a weekend forum in Nanjing, Jiangsu, that a trial liberalisation was likely to take place this year. Lending rates would be lowered and deposit rates raised.

The central government said in the 1990s that it would gradually reform the key rate pricing mechanism.

Lending rates are at present subject to a downside limit of 90 per cent of the central bank's benchmark rates, while deposits are capped on the upside by benchmark rates.

A 'breakthrough' could come as early as the end of this year, Ba Shusong, a researcher at the Development Research Centre of the State Council, said in an article on the centre's website yesterday.

Ba said the PBOC could lower the floor for lending rates to 80 per cent of benchmark rates in the first step towards a gradual expansion of the bands within which banks can set their lending and deposit rates.

Analysts with Barclays Capital expect the deregulation to take place 'on a multiyear horizon', as such moves in Hong Kong, South Korea and the United States took as long as six years.

'Deposit rate deregulation would ultimately raise bank funding costs and result in a smaller gap with interbank rates,' the Barclays analysts wrote in a research note yesterday.

The analysts estimate the average funding cost of mainland banks will increase by 56, 27 and 87 basis points under their base, bull and bear scenarios, respectively, following deregulation.

'However, the global experience has shown that banks typically counter such negative impacts with a variety of measures to eventually retain profitability,' the analysts wrote.

Premier Wen Jiabao said last month that the top leadership had 'unified thoughts' on breaking the banking sector's monopoly by granting more access to private capital.

'About funding costs, I can say frankly, our banks make profits too easily,' Wen said.

Net interest margin makes up 70-80 per cent of the net income of most mainland banks. The interest spread provides banks with an easy source of profits.

The one-year benchmark lending rate is now 6.56 per cent, while the deposit rate is 3.5 per cent.


The historical high of China's interest rate, in June 1996. The record low rate of 5.31 per cent was set in February 2002