China Removes Deposit Rates Floor

The biggest step yet by China’s new leaders to move the nation’s financial system toward market-set lending rates heightens focus on what the central bank says is an even tougher reform: lifting restrictions on savers’ returns.

The People’s Bank of China ended a floor on borrowing costs previously set at 30 percent below the benchmark, it said July 19. The limit on mortgage rates will stay to curb property speculation, the PBOC said. Also unchanged was a 10 percent limit on what banks can offer over PBOC-set deposit rates.

Forcing banks to compete for funds would offer consumers more spending power, while undermining the model of state-directed, subsidized credit bequeathed to Premier Li Keqiang, who took office in March. At stake is phasing in reform without exacerbating a slowdown in the world’s second-largest economy.

“Reducing controls on deposit rates would have a far bigger impact, boosting household income but also raising costs for large borrowers that have become addicted to cheap credit,” said David Loevinger, former U.S. Treasury Department senior coordinator for China affairs and now an emerging-markets analyst at TCW Group Inc. in Los Angeles.

The PBOC itself said three days ago that deposit-rate reform is “the most risky” part of liberalization. The central bank currently sets the one-year lending rate at 6 percent, with a one-year deposit rate of 3 percent. Prospects for a narrower interest margin may hurt Chinese bank stocks this week, according to Macquarie Capital Securities Ltd.

Bloomberg

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