Beijing might allow rural credit co-operatives to lend at rates up to 70 per cent above the central bank benchmark in its boldest experiment with interest rate deregulation, according to a senior People's Bank of China (PBOC) official. 'Rural credit co-operatives can already float their lending rates up to 50 per cent over [the PBOC's benchmark rate],' he said yesterday. 'If we want to further widen their interest rate band, we might consider, say, 70 per cent. 'We think raising the cap to that level is pretty much like interest rate deregulation. Because, even with total deregulation, most loans will be extended within that band.' However, the PBOC had yet to develop a concrete timetable for the further relaxation, he said. Rural credit co-operatives, which have been allowed to lend at rates up to 40 per cent over the PBOC rate since 1996, have historically led the way for rate deregulation at mainland banks. Urban banks can raise the PBOC's official rate by as much as 30 per cent in lending to small and medium-sized enterprises, and by 10 per cent for loans to large companies. They can reduce the PBOC rate by a maximum of 10 per cent in all-yuan lending. Only in all-foreign-currency loans and deposits above US$3 million (HK$23.4 million) can banks set their own interest rates. Yuan deposit rates have remained fixed by the PBOC. Arthur Lau, China director of ratings agency Fitch, said that as credit co-operatives usually operated in a particular village or township, the impact of rate reforms there would most likely be localised. Mr Lau said the tight geographical focus of rural co-operatives and the low profitability of Chinese agriculture meant problem loans could easily account for half of their lending. He said poor credit assessment and the need to boost their own bottom-lines might drive the co-operatives to slap the highest rate permissible on every borrower, a consequence the PBOC might not desire. The PBOC official declined to confirm domestic and international press reports yesterday saying the PBOC had proposed wider interest rate deregulation to the State Council to boost lending to small and medium-sized companies next year. Such reforms would enable urban banks to price in the higher credit risks of loans to newer small and medium-sized firms with sketchy operational histories. Such firms, many privately-owned, are seen as China's new growth driver. Accounting for more than 99 per cent of Chinese companies, they provide 75 per cent of the country's jobs and contribute about 60 per cent of industrial turnover and exports. However, mainland banks, particularly the big four state-owned commercial banks, have long directed most of their lending towards larger state-owned companies.