China mulls scrapping benchmark lending rates in line with market conditions in latest reform move
- People’s Bank of China weigh further interest rate liberalisation in the midst of the trade war with the United States
- PBOC governor Yi Gang also expresses confidence that the central bank can keep the yuan’s exchange rate relatively stable ‘at a reasonable and balanced level’
China is considering scrapping its official benchmark lending rates to allow banks to react to market conditions in the latest move to liberalise interest rates, People’s Bank of China governor Yi Gang said on Tuesday.
Yi’s comments in the middle of the trade war with the United States may be a bid to show that Beijing remains determined to continue market-oriented reforms rather than embark on aggressive monetary easing to help stabilise the economy.
Market reforms should continue to benefit ordinary citizens as well as help small and medium-sized companies that face funding problems, Yi was quoted as saying by he 21st Century Business Herald, a major Chinese media outlet.
“The [benchmark] lending rate has actually been liberalised, but the reform mentality can be still be explored further. For instance, discontinuing the announcements of the lending benchmark interest rates could be studied and at the same time there could be deep research on the [resulting] trends in loan rates,” China’s central bank chief Yi said.
He added that the role of benchmark deposit rates would continue within the financial system.
Chinese officials have long said they would reform the financial sector to fix interest rate distortions and make pricing more market driven rather than government determined. Currently, mortgages extended to homeowners and corporations are still to some extent referenced against the central bank’s benchmark lending rate.
China’s banking sector, which is dominated by the big four state-owned lenders – the Industrial and Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China and the Bank of China – prefer to lend to big, state-owned enterprises, not because they are more efficient but because their loans carry the implicit backing of the central or local government.
This means that due to the benchmark rates being artificially depressed by the central bank, lenders may decide the potential excessively low returns do not outweigh the risks of lending to risky small and medium-sized businesses.
Breaking up banking monopolies, improving bankruptcy laws and stricter enforcement of financial regulations could increase price transparency and reduce administrative fees for both lender and borrower, analysts said.
“The message here reveals officials’ determination to further increase the role of market interest rates,” said Jimmy Zhu, chief strategist at broker Fullerton Markets. “Market rates are more effective in reflecting current economic and liquidity conditions than benchmark rates.”
Yi also repeated that he was confident that the central bank could keep the yuan’s exchange rate relatively stable “at a reasonable and balanced level”.
He pointed out that the possibility of a US Federal Reserve rate increase in the near term has declined significantly, which is conducive to the stability of the yuan.
The message here reveals officials’ determination to further increase the role of market interest rates. Market rates are more effective in reflecting current economic and liquidity conditions than benchmark rates.
Yi, meanwhile, said that since the issuance of government bonds in 1981, the bond market has developed rapidly but that there is still much room for growth.
“We should promote the opening of the bond market to the outside world and continuously narrow the gap with mature markets,” Yi said.
China sorely needs to attract foreign investments to its financial sector and real economy especially after trade tensions between China and the US ratcheted up significantly this month.
It aims to develop its bond market with the rule of law and create a good legal environment, Yi said. It should also build a good market culture, connect internationally and strive to be widely accepted, added the central Bank governor.
