China Liberalizes Bank Lending Rates

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Jul. 22 – The People’s Bank of China (PBOC) has announced that it will enact reforms to liberalize China’s interest rates in a bid to attract additional business. The move also signaled that the Chinese government intends to change the way domestic banks operate by letting market forces play a larger role in China’s economy.

The PBOC removed the lending rate floor on domestic banks, which was previously set at 30 percent below the annually-set benchmark lending rate of 6 percent, in addition to removing controls on bill discount rates and lending rates for rural cooperatives. The lending rate range on individual housing loans and mortgages, however, remains unchanged due to concerns regarding property speculation.

Beijing also chose not to lift its cap on lending rates, nor did it alter the ceiling on the rates banks pay to depositors.

Ultimately, this change means that domestic Chinese banks are now free to charge whatever interest rates they deem appropriate as determined through their own independent risk assessments. Previously, the PBOC allowed banks to offer loans at discounted rates of up to 30 percent against the benchmark rate, but it had never scrapped the ceiling on deposit rates – which was held at 110 percent of the benchmark rate.

The move is expected to reduce borrowing costs for both businesses and individuals, and it is also likely to assist Chinese small and medium-sized enterprises that have found obtaining loans both difficult to afford and to negotiate. Furthermore, the political impact of the move means that lower interest rates will allow for a greater spread of borrowing across all sectors of the economy.

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