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China to lift lending rate controls: central bank

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(Globalpost/GlobalPost)

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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http://www.globalpost.com/dispatch/news/afp/130719/china-lift-lending-rate-controls-central-bank-1