Taking it one step at a time
- By Yi Xianrong
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E-mail China Daily, July 24, 2013
China's central bank announced interest rate reforms on Friday that are a milestone in China's financial marketization. It removed the floor on lending rates, allowing banks to cut rates as much as they like to attract customers, scrapped the controls on bill discount rates and lifted the ceiling on lending for rural banks. However, it did not remove the ceiling on deposit rates.
There was little shock to the market as the move had long been anticipated and the news was announced after the closing of stock markets on Friday, so there were two days for the market to digest the changes.
The long-term benefits of lifting controls on lending rates cannot be underestimated as it is the start of China's market-oriented reform of its financial market. Before the latest reforms the interest rates for both loans and deposits had controls relating to the benchmark rate and were strictly regulated by government.
Meanwhile, the central bank's relaxation on bill discount rates means that banks can set their own prices instead of calculating the discount rate, rediscount interest rate and the extra interest rates together. This change is good for guiding the market to use the Shanghai Interbank Offered Rate in the interest rate pricing process, which is a market-oriented practice, rather than using the benchmark interest rate as before.
Moreover, such a change will help promote interest rate liberalization. The central bank, instead of relying on the open market, can widely use the short-term interbank offered rate to regulate market liquidity as developed countries do.
In short, after years of development, SHIBOR has become a major benchmark of the pricing in financial products and services, so canceling the bill discount rates is a significant step for China to realize interest rate liberalization.
Before the lifting of the controls on lending rates, the competition among domestic banks was actually competition in the scale of lending rather than price. Under such circumstances, there was no motivation for banks to improve their abilities in credit risk pricing.
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