A boost to financial reform

The People's Bank of China announced Friday evening that it will remove the floor for lending rates. This is an important step in the financial and monetary reform process, even though the immediate impact on lending volumes should be modest.

China has traditionally controlled the lending and deposit interest rates that banks can charge and offer, with benchmark rates set by the PBOC. The government has for more than 20 years had a long-term objective of increasing the role of the market in the financial sector and monetary policy. For most of this time progress was modest, but the pace of financial and monetary reform has picked up recently.

In recent years, the authorities have taken steps to give banks more leeway in setting interest rates. On the lending side, the floor for interest rates that banks can charge was lowered to 70 percent of the benchmark lending rate in 2012. According to Friday's announcement, the floor was fully removed, including for the bill discounting rate. The floor on mortgage rates was left unchanged as well as the crucial cap on deposit rates.