Reuters: “China’s central bank removed controls on bank lending rates, effective Saturday, in a long-awaited move that signals the new leadership’s determination to carry out market-oriented reforms.
The move gives commercial banks the freedom to compete for borrowers, a reform the People’s Bank of China said on Friday will help lower financial costs for companies. Previously, the lending floor was 70 percent of the benchmark lending rate.
However, the PBOC, in a statement, left a ceiling on deposit rates unchanged at 110 percent of benchmark rates, avoiding for now what many economists see as the most important step Beijing needs to take to free up interest rates.
The latest step underscores Beijing’s resolve to start fixing distortions in its financial system and the economy more broadly as it tries to shift from export- and investment-led growth to more consumption-led activity.
Some analysts said cheaper credit could help support the economy, which has seen year-on-year growth fall in nine of the last 10 quarters.
“This is a big breakthrough in financial reforms,” said Wang Jun, senior economist at China Centre for International Economic Exchanges, a prominent government think-tank in Beijing.
“Previously, people had thought the central bank would only gradually lower the floor on lending rates. Now they scrapped the floor once and for all.”
The Australian dollar rose modestly on the news on hopes cheaper credit will lead to more demand from Australia’s biggest export market.
The announcement provided some support to weak stock markets in Europe .FTEU3 and a timely reminder to the world’s top financial leaders meeting in Moscow of China’s intention to rebalance its economy.
A Group of 20 draft communiqué will urge China to encourage more domestic demand-driven growth as part of wider efforts to rebalance the world economy, G20 sources said.
The United States welcomed the move, saying China promised to let markets play a bigger role in allocating credit during the U.S.-China Strategic and Economic Dialogue in Washington last week.
“This is a welcome further step in the reform and liberalization of China’s financial system,” Holly Shulman, a spokeswoman for the U.S. Treasury, said in an email.”
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