People's Bank Of China Removes Minimum Lending Rates Amid Slower Growth

Michael Teague  |

Somewhat in the shadow of the seemingly constant news about what has been or has not been said by Ben Bernanke and other Federal Reserve bank officials, the last few weeks has also seen a consistent stream of news about slower growth out of China.

On Friday, that news was given some perspective by the announcement from the People’s Bank of China that minimum lending rates for the nation’s financial sector would be eliminated. Until today, that minimum was set at 30 percent below the 6 percent benchmark.

While global markets seemed to take heart in the news it is not yet clear whether the move is a response to contraction in the world’s second-largest economy. If the PBOC’s logic is to stimulate the economy in the manner of the US central bank, a removal of limits on deposit rates is also likely to be necessary.

While the lending-rate reform will be a boon to the Chinese financial sector, and reduce funding costs for companies, many analysts believe that the kind of growth to which the country has become accustomed until recently can only be created by the freeing up of deposit rates. Lifting the deposit rate ceiling would increase household incomes, and divert Chinese investors away from riskier and more obscure financial instruments.

While the PBOC said in a statement that this initial step would have “important meaning in terms of encouraging financial support for economic growth and economic restructuring and upgrading,” the bank also cautioned that it was still too early to implement deposit-rate reform, calling such a move “risky” in the absence of a national deposit insurance system.

Last month, Chinese rates soared to an all-time high of 12.85 percent as the PBOC restricted liquidity, a move that was interpreted by many as an attempt to curb the growing practice of putting short-term funds towards longer-term investments.

[Image: The People's Bank of China, courtesy of Flickr Creative Commons]

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