China’s LChina’s Lending Rateending Rate

“A Small Step Forward”Since last two decades China’s banking system has gone through various changes. World’s top economic country China has recently made some experiments regarding their lending rate issues. In last June they took a decision to stop the risky form of bank lending. But on July 20th they came with another form of lending where all restrictions were withdrawn. Previously, they had a floor of 70% of base interest rate.

Except residential mortgages, banks are now allowed to fix the lending rate at any level they wish. In reality, deposit rates remain fixed by government order. China’s government has long maintained controls over banks’ lending and deposit rates. It has placed a ceiling on what banks can pay on deposits and a floor on what they can charge on loans. It maintained the deposit rate cap. which is 1.1 times the PBOC’s benchmark rates.

Banks like Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, will generate a high profit from it. Analysts find it as a tool to increase competition and lending to the smaller corporations who need fund for expansion. But according to critics, this will take time.

Chinese banks are not interested to lend at the floor rate yet. Again, other view says that SOES like CNOOC would now bargain and force the banks for cheaper loans. This would lead the non-performing loans at much lower rate. Also small and medium sized private sector like China Merchants or China Minsheng would join the race. On these options research firms and technical experts commented that local commercial banks along with the middling private sector would be hit hardest where as the big 5 state banks- Industrial and Commercial Bank of China, China Construction Bank, the Agricultural Bank of China, the Bank of China and the Bank of Communications would generate a lower ROE.

To keep their ratios stable additional fund will be needed up to $100 billion. Again if the policymakers liberalize the deposit rate the consequences upon banking sector would be more severe. The “definite profit” will not prevail. They would have to compete for customers, redesign their risk management. In conclusion they have to come to the battle ground.