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Wary of a slowdown, the central government has sought to boost investment levels to stimulate economic growth. Photo: Bloomberg

Worries over PBOC's ambitious bid to liberalise deposit rates

Mainland central bank's promise to liberalise deposit rates by 2016 looks shaky as objective clashes with GDP growth strategy

Don Weinland

The mainland's reform-minded central bankers may have been hasty earlier this year when they set a two-year timeline for liberalising deposit rates.

Economic slowdown on the mainland will make hitting that target - the final major step in financial reform - increasingly difficult as Beijing looks to maintain growth with investment while keeping the cost of lending low, Fitch Ratings said in a report yesterday.

"The reform impetus remains intact; but the longer the economy slows, the greater the risk that government will delay or water down its immediate objective of returning the economy to a more sustainable growth path," the Fitch report said, noting that the mid-2016 target for deposit liberalisation was too short.

People's Bank of China governor Zhou Xiaochuan in March said that liberalising deposits could take up to two years, a short timeframe cheered by some analysts but questioned by others at the time. Since then, Zhou, 66, has reportedly been due for retirement.

The mainland economy grew by 7.3 per cent year on year in the third quarter and many economists have downgraded their outlooks for full-year growth.

In response to slowing growth, the central government has sought to boost investment with the hopes of delivering 7.5 per cent growth for 2014, a target set at the beginning of the year.

State-run said on Wednesday that local governments and ministries were stepping up investments into construction projects, a signal that policymakers are increasingly wary of a slowdown.

New projects in the last quarter of the year will follow a burst of liquidity from the central bank during the past two months. Last week, the PBOC's third-quarter report confirmed it had injected 769.5 billion yuan (HK$973.7 billion) into several banks in September and October using a new monetary tool called a medium-term lending facility. It also injected an undisclosed amount of cash into policy banks.

The lending facilities will help banks continue the decades-old scheme of pushing cheap loans to state firms that invest in large public works projects or real estate developments.

Liberalising deposit rates - or letting banks compete on the interest they pay retail depositors - would stymie the investment-fuelled growth model by raising the cost of lending.

"It is believed that interest rate liberalisation would weigh on short-term growth and debt service burdens as it would inevitably lead to a short-term increase in the level of interest rates," said Ha Jiming, Goldman Sachs vice-chairman and chief investment strategist of private wealth management in China.

"Higher deposit rates in general would squeeze interest rate margins and cut into banks' profits."

Mainland lenders are hardly prepared to weather that challenge. The economic slowdown has struck bank balance sheets this year in the form of increasing non-performing loan ratios at lenders such as Agricultural Bank of China and China Citic Bank. Profit growth is also falling from a period characterised by year-on-year double-digit growth.

Liberalising deposits would push banks to increase their risk profiles, namely by lending to small and medium-sized enterprises, a primary source of bad debt this year. While good for stable, long-term growth, Fitch noted that more SME lending could exacerbate the bad loan problem for banks in the near future.

This article appeared in the South China Morning Post print edition as: Worries over deposit rate reform