Interest rate changes a big step on path to greater liberalization

China has made a breakthrough in liberalizing its interest rates, and there will be further expansion of allowed range around the benchmark rates, a former adviser to the central bank's Monetary Policy Committee said on Friday.

The day before, officials had decided to allow the interest rates paid on bank deposits to exceed the benchmark rates for the first time. Li Daokui, who is also a professor at Tsinghua University, said that decision was "historic".

"There is a trend toward a further deregulation of interest rates," he said. "But if Beijing really wants to liberalize rates without causing big problems, some supporting policies are needed, such as securitizing bank assets and broadening the definition of capital to alleviate the capital tension of lenders."

Li made the remarks while attending the Asia-Pacific Economic Cooperation China CEO Forum held in Beijing.

On Thursday, the People's Bank of China announced that commercial banks will be allowed to set the interest rates charged on their loans at or above 80 percent of the government's benchmark rate, down from the previous 90 percent. The central bank also gave them permission to set deposit rates at or less than 1.1 times the government benchmark rates, while reducing the rates themselves by 25 basis points.

"Instead of an asymmetric benchmark rate cut, which we thought made more immediate sense, the central bank decided to symmetrically reduce one-year benchmark rates but also introduced effective asymmetric rate changes by expanding the interest rate bands," said Ma Jun, greater China chief economist at Deutsche Bank AG.

"They've picked a good time to push ahead with interest rate liberalization so as to further rationalize lending decisions in the banking industry," said Chris Leung, senior economist at DBS Bank (China) Ltd.

This change is clearly aimed at protecting the interests of depositors, he said.

Leung added that the central bank will use this latest policy change to observe how banks behave when they compete more intensely for deposits.

"The chances are very high that there is every incentive for banks to offer the maximum deposit rates allowed by regulators.

"Large banks with ample deposits are not likely to immediately set deposit rates higher because their interest expenses will be too great," said a senior risk control officer at one of the Big Four State-owned lenders, who declined to be named.

"Instead, the competition to attract deposits among small and mid-sized banks may be more intense."

Zhou Xianzhi, who works in Bank of China's personal banking department, said deposit rates might increase by a maximum of 10 percent. Most Chinese banks, he explained, are scrambling for deposits to meet China Banking Regulatory Commission rules that require they keep loans to a certain proportion of the deposits.

Leung said it's important to note that China's execution of economic policies has moved to a new stage. Instead of pursuing outright cyclical stimulus strategies, the country has been gradually adopting various structural reforms this year, despite the global economy's increasing volatility.

"Over the longer term, we believe the liberalization of interest rates will provide the basis for a more efficient allocation of financial resources, and be an important condition in the liberalization of China's capital account," Ma said. "These fundamental reforms will eventually improve economic performance."

Although an increased liberalization of rates is expected to put pressure on banks' profits, Fan Wenzhong, head of the China Banking Regulatory Commission's International Department, said on Friday that many indicators now suggest the Chinese banking industry is in a sound condition.

On Friday, the commission released the full text of its new rules, which are based on the Basel II and Basel III agreements set by the Basel Committee on Banking Supervision, which coordinates the supervision of banking.

The tougher standards require what are deemed to be systemically important banks to have a capital adequacy ratio of 11.5 percent; for non-systemically important banks, the ratio is 10.5 percent. Banks are expected to meet the requirements by the end of 2018.

Contact the writers at wangxiaotian@chinadaily.com.cn and caixiao@chinadaily.com.cn