China's central bank has broadened the floating range for
lending rates in its latest move to establish a market-orientated
interest rate regime.
It also announced a 27-basis point cut, to 1.62 percent as
effective on December 21, in the interest rate it pays on excess
bank reserves in an effort to "encourage financial institutions to
improve the efficiency in fund utilization."
A broader floating range for interest rates on loans will "help
the development of small and medium-sized enterprises and improve
employment, help propel the reform of financial institutions, and
is conducive to containing usury," the People's Bank of China
(PBOC) said in a press release on Wednesday.
Starting on January 1, the upper limit of the lending rate range
by commercial banks and urban credit cooperatives will be raised to
1.7 times the benchmark rate set by the PBOC, while that by rural
credit cooperatives will move up to 2 times that of the central
bank's rates.
"I think they are projecting a notion that prices need to
reflect supply and demand," said Wang Yuanhong, a senior analyst
with the State Information Center.
Borrowing needs, especially from small and medium-sized
enterprises, have been strong this year. But the previous floating
range had been too narrow to sufficiently reflect lending risks,
central bank officials said earlier this month.
Analysts said it is too early to predict the possible impact of
a broader floating range on overall credit growth before it becomes
clear how banks and businesses react accordingly.
But some commercial banks said the policy actions, especially
the reduction in bank reserve interest rate, seem to divert from
policy intentions shown in recent months.
The interest rate cut would easily cost any of the four major
state-owned commercial banks up to 50 million yuan (US$6 million)
in interest incomes per year. That, coupled with greater freedom in
pricing loans, spells an encouragement for commercial banks to lend
more.
And interest rates on repurchase agreements are expected to
fall, enabling smaller commercial banks, many of which had
liquidity difficulties in recent months, to borrow cheaper funds to
finance their aggressive lending operations.
The rapid loan increases this year have fuelled inflationary
concerns, prompting the central bank to raise the bank reserve
ratio by 1 percentage point, to 7 percent of total deposits, in
September.
M2, the broad measure of money supply, rose by 20.4 percent on a
year-on-year basis to 21.64 trillion yuan (US$2.6 trillion) at the
end of November, which the central bank noted yesterday as "still
on the fast side."
"Theoretically, the move will stimulate lending," said a senior
manager with a state-owned commercial bank. "We are a bit confused
as to what they want us to do."
The current 1.89 percent interest rate on excess bank reserves
had constituted an actual lower end for money market interest
rates, which analysts say have troubled a central bank mindful of a
market-orientated interest rate regime.
(China Daily December 12, 2003)