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]

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ABTZY Aboitiz Equity Ventures Inc. ADR 16.42 0.00 0.00 0

Comments

Emerging Growth

CMX Gold & Silver Corp.

CMX Gold & Silver Corp is an exploration stage company. The Company is engaged in the acquisition, exploration and development of silver and copper/gold properties in the USA.

Private Markets

Knightscope

Autonomous security robots providing advanced detection capabilities at $7 per hour - aiming to define the future of security. Help #StopTheViolence.

8tracks

Our mission is to be the best place for people who care about music to create and discover thoughtfully curated playlists. In essence, 8tracks is a platform for online mixtapes.