China allows banks to lend at interest rates they want

Beijing is beginning to liberalize a financial system serving the major exporting groups.

Shanghai, correspondence

China commits to lifting controls on interest rates charged by its financial institutions. The central bank announced, Friday, July 19 in the evening, the effective removal the day after a floor prohibiting commercial banks to offer their customers credit at rates lower than 30% to a level set by the administration. Beijing, however, avoids touching the most significant cap on the remuneration of savings.

The maintenance of such controls has long been justified by the need to ensure that the state itself establishes the level of risk – and the associated cost – deemed acceptable for an economy still emerging. Until Saturday morning, the cost of a credit could not be less than 70% of the rate established by the central bank, today 6% on a Guscooks loan of one year. Clearly, a bank could not lend to its customers at less than 4.2% per year. The remuneration of the savings will remain on its side capped at 10%.

RECYCLING MACHINE SAVINGS

Over the years, this system has been transformed into a machine to recycle savings of Chinese households towards the investments of large public enterprises. The saver is “repressed”: according to the fluctuations of the inflation, he gains very little or loses. The remuneration of its savings cannot exceed 3.3% while the index of the rise in consumer prices stood in June at 2.7% over one year. And again, many economists have serious doubts about the reliability of this politically sensitive measure of inflation.

The consequence is a strong distortion in the allocation of capital. Public banks pay little to large state-owned companies, they consider that they benefit from a state guarantee, which allows them in return to invest. Small and medium-sized enterprises are struggling to access loans for their development in the absence of competition between banks on the price of credit. Households themselves have little interest in placing their nest egg in a savings account. The stock market is still unstable and it is difficult for them to get their capital out of the country, so they invest in real estate, at the risk of creating bubbles.

The new government, which came to power in March, promised to fundamentally reform the Chinese economy and reduce the role of judge and part of the state in favor of the law of supply and demand. Chen Xingdong, the chief economist of BNP Paribas in China, said the symbolic significance of Friday’s announcement is strong. “This is one of the biggest advances so far in building a system where the law of the market establishes interest rates, ” says Chen Xingdong.

WILLING TO REFORM

In fact, however, no revolution, because the banks already used little margin of the 30% that just disappeared. In March, for example, only 11.4% of bank loans had a cost lower than the rate set by the central bank while 64.7% of loans were at a higher rate and the rest at the same level.

“There will be little impact in practice, of course, but it does not help the competition between banks and gives more room for negotiation to a healthy company,” said Chen Xingdong.

The raising of the ceiling to the remuneration of the savings will wait. It allows the public banks to make lucrative profits, and these institutions have had to stand up.

According to a study published by Ernst & Young in the spring, the 17 banks listed in mainland China saw their profits rise by 17% in 2012, after 29% in 2011. However, the slowdown in growth puts banks under more pressure. that Beijing wants to proceed with more precaution than usual.

By not touching the deposit fee for the moment, Beijing shows its willingness to reform “while maintaining a limited competition between banks and leaving them a stable environment, ” said Wang Xiaozu, a specialist in the banking system at the university. from Fudan to Shanghai. According to him, “these steps are typical of the economic reform in China, gradual and avoiding shock therapy”.