China’s central bank, on Friday, announced it would scrap the floor on lending rates, and, for the first time, allow financial institutions to set rates themselves in a move seen by economists as likely heralding further reform measures in the coming year.
The People’s Bank of China (PBOC) also eliminated the ceiling limit for lending from rural banks, the official Xinhua news agency reported, but did not remove controls on deposit rates.
The PBOC, in a statement, said the move to scrap the floor limit would help cut costs for enterprises in raising funds and more efficiently allocate resources to take forward restructuring.
The announcement was hailed as “a breakthrough” by some economists.
“Previously people had thought the central bank would only gradually lower the floor on lending rates. Now they scrapped the floor once and for all,” Wang Jun of the China Centre for International Economic Exchanges (CCIEE) told Reuters.
Others, however, said that easing controls on deposit rates would be a far more important reform measure. The PBOC said it had not yet removed controls on deposit rates, saying such a move would be more complicated.
Chinese officials have acknowledged the need for doing so if the country is to address severe imbalances in the economy and promote consumption as a driver of growth.
With low returns on their savings, an increasing number of Chinese have also turned to the real estate sector, prompting concerns of an asset bubble. Recent years have also seen the rise of a shadow banking industry that has increasingly concerned regulators.
“Because of a distorted rate, the real interest rate return has been in some years negative so the people want alternatives,” Oliver Meng Rui, professor of finance at the China Europe International Business School in Beijing, told The Hindu.
Private enterprises in China have also long complained of inadequate access to funds, with the major banks here seen as favouring politically-influential state-owned enterprises by offering them favourable rates.
The announcement is the first major economic reform measure announced by the new leadership under President Xi Jinping and Premier Li Keqiang, which took over in March.
In recent meetings, Mr. Li has stressed the need for more efficient allocation of resources and to allow greater play for the market.
The Communist Party under Mr. Xi is expected to announce bolder economic reform measures when its third plenum is held later this year, possibly in October. Economists have suggested that further financial reforms, as well as land and income distribution reforms, may be unveiled.
“The new leadership wants to take advantage of the honeymoon period,” Mr. Rui said. “Otherwise, they know they will miss opportunities.”