China lifts control on Bank lending rates

In a move toward creating a market oriented financial system to support economic growth, the People’s Bank of China and its Central Bank promulgated to lift the controls on bank lending rates.

Background for why  China lifted the control on Bank lending rates:

• Beijing has long used its banks to subsidize state industry with low-interest loans. Depositors who put their money were paid low rates on deposits in recent years.
• Families failed to keep up with inflation and lost money by leaving it in the bank.
• The household spending was suppressed which is among the lowest in the world as a percentage of the economy and efforts were made for domestic sustenance rather than China’s growth from exports and investment to more self-sustained domestic consumption.
• Chinese families looking for a better return on their savings invested into stocks and real estate. They have also shifted money into wealth management products which are indeed too risky for household investors.

How China’s lifting of control on bank lending rates will affect its economy?

• A change in the China’s interest rate policy will be one of the major changes required to keep its growth strong.
• Allowing banks to negotiate their own rates with borrowers could bring in more credit to private enterprise. Until now, banks were lending generally to state industry instead of entrepreneurs who create China’s new jobs and wealth so this can bring a change.
• This will be a noteworthy development for China’s financial sector in the direction of having interest rates determined by market forces rather than government.
• This reform is to further develop the basic role of market allocation of resources to promote financial support for the development of the real economy.
• It will allow banks to charge lower rates to more valuable borrowers, cutting down costs for healthy businesses and strong growth. Till now the lower limit on lending rates was set at 0.7 times the state-set interest rate.
• Private sector borrowers may get more access to credit by paying more and this could help to reduce their dependence on a vast, unregulated credit market.

Month: Current Affairs - July, 2013