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Tom Holland

On Friday evening, the People's Bank of China announced it would scrap minimum lending rates for the banking sector.
The reaction was predictably enthusiastic.
"A major step in the financial and monetary reform process," gushed British bank RBS.
"These moves reflect the will of the new leadership in financial liberalisation," declared Goldman Sachs.
"Perhaps China's most important step towards financial market liberalisation in many years," added research house Capital Economics.
Please forgive me if I manage to contain my excitement.
Don't get me wrong. Ditching state controls on bank lending rates is a good thing.
It's just that in the real world, Friday's move won't make a blind bit of difference to anyone.
The big reform as far as lending rates are concerned took place back in 2004, when the central bank scrapped the ceiling on the interest rates banks are allowed to charge.
Removing the floor is irrelevant. It's not so much a case of shutting the stable door after the horse has bolted, but of opening it to let your ponies out when they are already frolicking gaily in the paddock.
For one-year loans, the floor had been set at 4.2 per cent - a sizable discount to the PBOC's benchmark rate of 6 per cent.
But scrapping this minimum will not reduce lending rates. As the first chart below shows, China's banks make almost 90 per cent of their loans at or above the benchmark rate.
According to an estimate from Capital Economics, the average bank lending rate last month was 8 per cent (see the second chart), a full 2 percentage points above the benchmark and almost double the floor rate. Over the last year very few loans have been extended at the floor rate. Getting rid of it now will have no appreciable effect.
In any case, as long as bank credit continues to be allocated according to government-determined quotas, fiddling with lending rates will have little impact.
State-owned banks will continue to lend the bulk of their quotas to well-connected state-owned companies regardless of rates, comfortable in the belief that they will always be backstopped by the government.
Meanwhile, most of the private sector will continue to be shut out of the formal financial system, forced instead to rely on the shadow banking market, where lending rates are currently running at a crippling 20 per cent.
That's not to say all interest rate reforms are meaningless. As any number of analysts pointed out over the weekend, if the authorities really wanted to press ahead with financial liberalisation, they would not get rid of the floor on lending rates. Instead, they would scrap the ceiling on bank deposit rates.
At the moment, the cap on demand deposits - which is where most of China's 44 trillion yuan (HK$56 trillion) in household savings deposits is kept - is set a whisker below 0.4 per cent.
With consumer inflation running at 2.7 per cent, in real terms, that means China's savers are losing the best part of 1 trillion yuan a year by keeping their money in the bank.
This cap on deposit rates depresses consumption enormously. Yet Beijing is reluctant to get rid of it, afraid that the country's banks would quickly jack up their savings rates to compete for depositors.
That would erode the banking system's handsome profit margins. At the moment, China Construction Bank, for example, enjoys a net interest margin of 3.4 per cent, fully three times what European giant Commerzbank makes.
Nervous of a bad debt surge as the economy slows, Beijing doesn't want to jeopardise that fat margin, or the low borrowing rates enjoyed by state-owned enterprises.
So, for the time being, real interest rate reforms remain off the table.
tom.holland@scmp.com


Beijing's latest rate reform makes no difference at all

Rate reform may serve interests of state companies

Economists say the PBOC's move signals Beijing's determination to forge ahead with capital markets reform to remove conditions that helped fuel the property-led credit bubble. Photo: Reuters

Chinese banks given freedom to set lending rates

China's central bank announced long-awaited interest rate reforms on Friday

Business

Banking & Finance

Opinion

Fiddling with lending rates will have little impact as long as credit continues to be allocated according to government-determined quotas


On Friday evening, the People's Bank of China announced it would scrap minimum lending rates for the banking sector. The reaction was predictably enthusiastic.


Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Monitor

.css-1m2rp1p{color:#34b8b5;}Monitor | Beijing's latest rate reform makes no difference at all

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Fiddling with lending rates will have little impact as long as credit continues to be allocated according to government-determined quotas

Monitor | Beijing's latest rate reform makes no difference at all

Fiddling with lending rates will have little impact as long as credit continues to be allocated according to government-determined quotas