The People’s Bank of China, the country’s central bank, announced on September 5 that China will free-up interest rates on foreign currency loans and part of the rates on foreign currency deposits from September 21. It is both a major step forward in the liberation of its tight interest rate system and a challenge to the country’s commercial banks.

By the end of June, the amount of foreign currency deposited in China’s commercial banks reached US$113.68 billion, accounting for 7 percent of the total foreign currency deposits in China. The amount of foreign currency loans issued by commercial banks was US$69.84 billion, accounting for 6 percent of all that in China. Although foreign currency loans only constitute a small portion of commercial banks’ total business now, they have developed rapidly in the past two years and are having greater overall impact on commercial banks.

The central bank now allows commercial banks to set their own interest rate on foreign currency deposits and loans, a situation that will foster possibly fierce competition among those banks.

Strength and reputation, level of interest rates, financial products and service capacity will all soon become the key factors in this competition.

The free-up of interest rates on foreign currencies will change the customer structure. Minor enterprises of rising trades with good reputation and outstanding achievements may turn to foreign banks, which have the advantage in dealing with foreign currency business, or some joint-stock banks that enjoy a more flexible management system. The main portion of customers of commercial banks may shift to large state-owned enterprises and joint-stock enterprises.

After the reform of the interest rates on foreign currencies, commercial banks will need to rely on creativity and business capacity to attract customers and stay afloat. They must be able to strike a balance between loan and deposit interest rates. And they will also have to hire a batch of outstanding client managers who have experience working with foreign currency customers, as well as production experts with comprehensive knowledge, rich experience and strong creativity.

After the liberation of interest rates on foreign currencies, the interest rate risks will increase.

A different floating degree of deposits and loans interest rates as well as short-term and long-term interest rates may cause structural risks. And there will be risks if customers choose to repay or draw the money in advance.

Customers will raise their financial demands on commercial banks and pay more attention to the anti-risk function of low-cost financing. The majority of commercial banks’ customers will consist of private enterprises, small and medium-sized enterprises and high-tech enterprises, according to the article.

Interest rates used to be set by the central bank in its control period. With the freeing of those rates, commercial banks will now need to become proficient at setting and forecasting the price of foreign currency on the capital market. Such a pricing mechanism has not existed for years and the reconstruction of that mechanism has become a pressing matter for commercial banks.

Despite the challenges, the reform also provides new opportunities for the operation and development of commercial banks.

High interest rates for deposits will not be necessary for commercial banks wishing exploit the market after the reform. Instead, commercial banks should set rational interest rates according to different varieties, time limits and amounts, and create new varieties to attract different investors.

At the same time, intermediate businesses with high additive value should be enhanced to increase the profit. As to the credit business, new varieties should be created to provide inflation proof and increment service. This requires that companies pay close attention to the risk analysis of client credit and capital handling.

The risk management of interest rates should be strengthened. The committee in charge of assets and liability should step-up its efforts, improving its risk management and putting forward comprehensive analyses of market trends, risks prevention strategies and emergency measures.

The once stable relationship between enterprises and commercial banks may turn into a price-oriented business relation. A new operation mode centered on market profit opportunity will replace the traditional one. Last but not least, commercial banks should attach importance to training talents. The reform of interest rates brings a whole new dimension to domestic bank business that will require a new brand of expert, called financial engineers in Western countries. They are the very talents needed in China’s commercial banks.

(China Daily)