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China to lift lending rate controls: central bank
by Staff Writers
Beijing (AFP) July 19, 2013

China's banks warned to be prudent in setting rates
Beijing (AFP) July 20, 2013 - Chinese banks took control of setting loan interest rates on Saturday as the country's central bank warned them to be prudent and alert to credit risks.

The People's Bank of China (PBoC) announced Friday that it was lifting controls on loan interest rates effective Saturday, framing the move as a way to lower financing costs for businesses and support China's long-term economic restructuring.

In a statement on its website on Saturday, the central bank said that loan interest rates should be set "on the basis of market supply and demand", while taking account of "credit risk".

"Financial institutions must actively adapt to the market price-setting method" for fixing the rates, it said.

The central bank also told institutions to "construct improved pricing mechanisms", raise levels of service, maintain normal lending and "strengthen interest rate risk management".

Under the reform, the central bank removed a lower limit on lending rates, which had previously been set at 70 percent of its fixed benchmark rate.

But it said it would not adjust current restrictions on deposit and mortgage rates, the latter in order to promote "healthy development of the housing market".

The move to give banks control of loan interest rates comes as growth in the world's second-largest economy has slowed this year, setting off alarm bells among analysts about prospects for the rest of 2013.

Gross domestic product expanded at 7.5 percent in the second quarter, down from 7.7 percent in the first quarter and 7.9 percent from the last quarter of 2012.

The figures this year have so far proved disappointing after the 7.8 percent growth seen in 2012 -- itself the worst in 13 years.

Analysts described the measure as a positive and symbolic step toward liberalisation of China's still highly controlled financial system.

"The government is signalling a commitment to letting market forces play a greater role in determining financial conditions," economists at Capital Economics wrote in a report Friday.

"In the long-run this should encourage lenders to pay more attention to credit risks and improve the allocation of credit."

Cao Yuanzheng, chief economist at the Bank of China, cautioned that banks need more time to gear up for any further freeing up of the system, such as the removal of a cap on deposit rates, the state-run China Daily newspaper reported Saturday.

"The liquidity crunch in the interbank market in June has shown that banks haven't equipped themselves with mature liquidity management," Cao said, according to the newspaper.

"They are not ready for more substantial deregulation on interest rates."

A cash crunch spooked Chinese financial markets late last month before the PBoC, which had ordered banks to strengthen liquidity management, moved to calm nerves with an offer of support.

The brief turmoil underscored rising concerns over excessive lending by banks and other weaknesses in China's financial system, including opaque non-bank forms of lending, often called "shadow finance".

China's central bank will lift controls on lending interest rates and allow financial institutions to set them, it said on Friday, in a step toward liberalising the financial sector.

The bank touted the move as a way to lower financing costs for businesses and support China's long-term economic restructuring, while analysts called it a small positive step toward liberalisation.

They added that the move could help China's growth rate, which saw its second consecutive drop in the second quarter -- falling to 7.5 percent -- renewing concerns about the world's second-largest economy.

"The People's Bank of China has decided, as of July 20, 2013, to completely relinquish control of the lending rates of financial institutions," it said on its website. As of Saturday the bank will allow institutions to "set lending rates themselves based on commercial principles" it added.

The change will "be good for optimising the allocation of financial resources" and "more powerfully support the restructuring and upgrading of the economy", it said.

The bank removed a lower limit on lending rates, which had previously been set at 70 percent of the benchmark rate fixed by the central bank.

But it said it would not adjust policies on mortgages in order to promote "healthy development of the housing market".

Property prices have continued to rise in recent years despite several measures to try to control them, prompting frustration from ordinary Chinese.

Last month home prices in major Chinese cities jumped 7.4 percent year-on-year to an average of 10,258 yuan ($1,672) per square metre, a survey by Soufun Holdings, China's largest real estate website operator, showed.

Allowing lending rates to drop could benefit the economy and help it reach the annual growth target set at 7.5 percent, economists Li-Gang Liu and Hao Zhou of ANZ said in an email.

"To some extent, it could be regarded as a 'stimulus' to the real economy," they wrote.

Gross domestic product expanded at 7.5 percent in the second quarter, down from 7.7 percent in the first quarter and 7.9 percent from the last quarter of 2012.

The figures this year have so far proved disappointing after the 7.8 percent growth seen in 2012 -- itself the worst in 13 years.

However other analysts saw the move as a "moderate" step in the wider context of the reform of interest rates, rather than a response to recent signs of economic slowdown.

China economist Zhiwei Zhang of Nomura pointed out in an email that Premier Li Keqiang had already announced the reforms as a goal for 2013 in a speech earlier this year.

He called the move a "positive" but also "relatively moderate measure" toward that end.

It suggested China "intends to take a gradual approach" in liberalising interest rate policy, he said.

Mark Williams, chief Asia economist at Capital Economics, called the lending rate lift a "significant development for China's financial sector" -- but said that it would have minimal actual impact.

In principle more credit-worthy borrowers could now enjoy better rates, but "in practice the immediate difference will be small", he said.

Bigger firms have already been able to access alternative sources of credit, thanks to a fast-growing corporate bond market.


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