On July 19th, China announced interest rate reform and removed the floor in lending rate. The change, effective on July 20th, abolished a floor set at 30 percent below the current 6 percent benchmark, giving banks freedom to set their own lending rates. The statement also unveiled other measures:
=> To scrap ceiling on lending rates for rural credit cooperatives.
=> To remove curbs on Bills discount rate.
=> To continue differentiated lending policies for housing sector:
- To keep lending floor for individual home loans.
- To keep lending floor for mortgages unchanged.
*** Still need to curb speculation in housing market
=> To keep deposit rate floating rate unchanged.
*** Liberalizing bank deposit rates needs mature market conditions.
*** Note: Previously, China set a minimum limit on interest rates and maximum limit on deposit rates in order to support the lending margins of state banks.
- By a step-by-step process, China is liberalizing the money market. These measures will help to increase competition between banks.
- Lending rates should decrease helping growth to accelerate in H2. It will lower financial costs for companies and households, yet, banks’ margin (spread between lending and deposit rates), which represents almost 80% of net results of the four largest banks, will be under pressure.
- Chinese authorities stay coherent to the extent that they still try to curb speculation in housing market.