Move may be just the first step as Beijing wrestles with its weakest economic expansion in many years

Analysts wonder whether deposit rate liberalization has been put off for now.

BLOOMBERGJULY 20, 2013

 Photograph by: Getty Images Files , Bloomberg

China has eliminated the lower limit on lending rates offered by the nation’s financial institutions as economic growth slows and authorities expand the role of markets in the world’s second-biggest economy.

The change, effective Friday, eliminates a limit set at 30 per cent below the current 6 per cent benchmark, according to a People’s Bank of China statement. The central bank left a deposit-rate cap unchanged.

While the move temporarily jolted world stocks higher, the PBOC acknowledged that it was a limited step and said that freeing up deposit rates would be more important. The shift came as central bankers and finance ministers from Group of 20 nations gathered in Moscow, and after a cash squeeze in money markets curbed a record expansion in China‘s credit.

“While deposit-rate liberalization is still possible, the fact that a decision was made to just remove the lending-rate floor suggests that more aggressive liberalization proposals were defeated, or at least delayed,”

said Ken Peng, senior economist at BNP Paribas SA in Beijing. “This decision shows that some reform is being done, but may actually reduce the chances for deposit-rate liberalization in the near term.”

Raising the deposit-rate ceiling would improve household incomes and reduce the attractiveness of non-traditional wealth management products while threatening banks’ profit margins, Peng said.

The move will lower companies’ funding costs and boost financial institutions’ pricing capabilities, the PBOC said. In March, only 11 per cent of loans were priced below the lending benchmark, according to central bank data.

The nation’s economy grew 7.5 per cent in the second quarter from a year earlier and is at risk of the weakest expansion in 23 years. The announcement builds on pledges by Premier Li Keqiang to expand an overhaul of interest rates, tagged by the World Bank and the International Monetary Fund as a priority in financial reform.

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