SHANGHAI, July 12: China may scrap the official floor under banks lending rates as the first major step to liberalise its interest rate regime, the official China Securities Journal reported on Friday, as regulators signal for accelerated reforms to cope with distorted capital flows and slowing economic growth.
‘Plans for promoting interest rate liberalisation have already been drafted,’ the report said.
‘Industry sources forecast that the floor for lending rates will be scrapped.’
The official mandated lending rate currently stands at 6 percent.
Aside from freeing up lending rates, regulators may also widen the range for banks’ deposit rates on large amounts of long-term savings, although the rates on small savings may remain unchanged, the newspaper said.
The official deposit rate currently stands at 3 percent, but the report said liberalisation of deposit rates may be more limited.
Many economists have criticized the fixed interest rate regime for depressing consumption in favour of over-investment, by effectively transferring the savings of ordinary Chinese citizens into underpriced loans to inefficient state-owned enterprises (SOEs).
The model served to support China’s drive to make sorely needed upgrades to the national infrastructure, but it has now become a source of inflationary pressure and asset bubbles.
State-owned companies in particular have been widely blamed for using cheap credit from the Chinese banking system to speculate in real estate and stock markets, while overinvesting in fixed assets that have produced widespread industrial overcapacity in China.
The government last reformed the interest rate system in mid-2012, when it allowed banks’ deposit rates to be set at 110 percent of the official benchmark rate, and lowered the limit for banks’ lending rates to 70 percent of the benchmarks from 80 percent.
The People’s Bank of China also cut interest rates twice in June and July last year.
Last week the State Council, China’s cabinet, announced plans to channel more bank loans to companies in the real economy.
To pave the way for interest rate liberalisation, the government has also approved the relaunch of a government bond futures market to help the market price money. Trading is expected to start in August or September.
(AGENCIES)
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