From the ANZ:
The People’s Bank of China (PBOC) announced new measures to further liberalize interest rates, effective from 20 July 2013.
The central bank cancelled the lending rate floor, which is 70% of the policy lending rate set by the PBoC. Financial institutions will be allowed to set their own lending rates.
Bill discount interest rate controls are also scrapped, and financial institutions can decide on the rates.
The lending rate cap will be removed for rural credit cooperatives.
The PBoC will maintain strict differentiated housing loans policy, and the individual mortgage loan interest rate floating range will not be changed.
This is an important step towards interest rate liberalization. The next step would be to remove the ceiling of the deposit rate. We think that China’s central bank will accelerate the development of the Shanghai’s inter-bank market and to promote SHIBOR as the benchmark interest rate.
We believe that China’s state-owned enterprises will definitely benefit from the removal of the lending rate floor, as they will have greater bargaining power over banks. In the meantime, the commercial banks’ margin is likely to be squeezed significantly. We would like to emphasize that the government bond yields will provide a floor for the lending rates as bank’s treasurers will still compare its return with investment opportunities.
However, the impact is not across the board. For the big banks, the funding costs will be much lower as they are holding large chunk of demand deposits, and they could give further discount to increase the market share. For the medium and small banks, it will be more difficult for them to compete for loans due to relatively higher funding costs in the inter-bank market unless the overall liquidity condition is improved.
From a macro perspective, to some extent, it could be regarded as a “stimulus” to the real economy as the SOEs will face a lower effective borrowing rate, and would help the economy to pick up somewhat in late Q3 and Q4. Therefore, a 7.5% growth target is more likely to be achieved this year.
ANZ is, in effect, arguing that the PBOC just cut interest for the real economy. This is hopeful stuff. The alternative (and stronger case) is put by UBS and Barclays via Bloomie:
China’s move to loosen interest-rate controls is insufficient to cut corporate borrowing costs in coming months as the economy expands at the slowest pace since 1990, according to Barclays Plc and UBS AG.
The People’s Bank of China scrapped the floor on the rates banks can charge customers on July 19 while keeping a cap on deposit rates. Yuan forwards rose and Chinese stocks trading in the U.S. posted the first back-to-back weekly gain since May as the change signaled policy makers’ commitment to market reforms.
Chinese Premier Li Keqiang, who took office in March, is accelerating financial reforms to revive the economy after gross domestic product growth slowed to 7.5 percent in the second quarter. Photographer: Jochen Zick/Pool/Getty Images
While the move represents a step toward letting the market setinterest rates, the initial impact will be limited because banks have little incentive to lower borrowing costs below the current 6 percent benchmark, Barclays’s analysts wrote in a report July 19. Total lending fell to a 14-month low last month amid a cash squeeze that led to higher interbank funding costs.
“You cannot say this is credit loosening when the total financing is lower,” Bhanu Baweja, the global head of emerging-market fixed income and foreign exchange at UBS, said by phone from London July 19. “It’s not the price of the money that matters in China, it’s the quantity that matters.”
…“We do not expect it to lead to a significant or immediate change of banks’ lending practices and lending rates,” Barclays economist Jian Chang wrote in the note. “The lending floor was not binding and banks still have significant pricing power.”
