In a move to liberalize the interest rates for lenders, China announced that it is considering a change in its policy that would essentially scrap the dependence on the country's official benchmark lending rates. By doing so, banks and lenders can now react and change their interest rates according to the market conditions at any given time.
The governor of the People's Bank of China, Yi Gang, announced this week that the change will be part of China's market-oriented reforms. China is apparently looking at these reforms to combat the effects of the ongoing trade war with the United States. The country is likely moving away from more aggressive monetary easing in an attempt to stabilize its economy.
Yi also stated that the planned reforms should be more beneficial to ordinary citizens and to small and medium-sized businesses. According to the official, the benchmark lending rates are no longer applicable and lending rates should be liberalized. However, there likely needs to be further study before it is implemented.
This will include a study of trends in loan rates with and without rate being based on the benchmark. Yi also stated that the benchmark deposit rates for lenders and banks will still be in effect.
China has long been considering reform in the financial sector to fix interest rate problems experienced by financial institutions. As it stands, lending rates have been mainly government determined. With the liberation of the lending rate from benchmarks, banks could provide rates that are more market driven.
Current mortgages, for example, are still referenced against the central bank's benchmark. This had made a lot of sense as China's banking sector is mainly dominated by large state-owned lenders such as the Bank of China, the Commercial Bank of China, the China Construction Bank, and the Agricultural Bank of China.
Due to the rates being controlled by the central bank's benchmarks, most lenders tend to steer away from risky small and medium-sized business. If the banks are able to have more control over their interest rates, smaller business and individuals may be given more opportunities.
Apart from the liberalization of interest rates, China is also looking into other reform measures.
This will apparently include improving financial transparency, better bankruptcy regulation, and stricter enforcement of currently financial laws. Financial experts believe that the announcement is a step in the right direction and is a clear sign that China is committed to improving the financial sector. After all, market rates have been proven to be much more effective in determining the state of the economy as compared to government benchmark rates.
