Who Will Benefit From Liberation of Loan Interest Rates in China?
The Chinese financial market has
been in great shortage of money.
Recently, the Chinese Communist Party
(CCP) launched a full liberalization of loan
interest rates for financial institution regulation.
This has gathered international attention.
Some observers think that the CCP will implement
financial reform, with loan interest rates marketized.
Some expect the CCP to withdraw
foreign currency control in the future.
Other experts believe this is an illusion,
because the Chinese authorities did
not relinquish control on deposit rates.
Experts highlight that liberalization of loan interest
rate controls will finance the nearly bankrupt
state-owned enterprises and local governments.
It will slow down economic difficulties.
The CCP central bank announced cancellation
of decade-long lower limit loan interest rates.
However, the market is still disappointed, as
the deposit rate control is still not relinquished.
Feng Xingyuan, Deputy Director of Beijing Tianze Institute of
Economics, hopes deposit rate control can be relinquished.
If so, free market competition will be more comprehensive,
but the poor performance banks may increase their costs.
Feng Xingyuan: “It has actually been
said before that it would be liberalized.
The financial authorities said this,
but it was actually not liberalized.
There were no actions.
It was a 2.3 upper limit in rural communities,
and other banks and financial institutions
interest rates are relatively close to each other."
Radio France Internationale quoted experts commentaries.
The marketization of Chinese banks’ loan interest rates
will not change the real interest rates in the short term.
This is because the deposit interest rate cap is not liberated.
This showing the ability of financial institutions
to determine pricing has not been challenged.
This initiative of the central bank
is more symbolic than substantive.
The Wall Street Journal discussed the
illusion of market interest rates in China.
It said that allowing banks to lower loan interest
rates is to appease state-owned enterprises,
rather than promote interest rate marketization.
These enterprises are dependent on loans,
Pressure on heavily debt ridden state-owned enterprises
will certainly be eased by lowering loan interest rates.
It has been reported that some Chinese leaders
recently hinted their policy priorities have changed.
Premier Li Keqiang spoke last week about
avoiding economic ups and downs, and to
maintain the economy at a reasonable level.
This will involve economic growth, and to ensure
employment levels will not drop below the lower limit,
and for price increases to not exceed upper limits.
However, reports said that it was too early to
announce a new era of Li Keqiang economics.
Jian Tianlun, US-based economist:"Loan interest rates
lower limit cancellation will reduce the costs for some state-owned enterprises
who are facing bankruptcy or making little profit.
It will reduce some costs, and stimulate the economy,
but will also cover up inefficiencies in large enterprises."
Jian Tianlun highlights that liberating loan interest rates
will directly benefit those large state-owned enterprises.
It will also benefit the local governments,
which can manipulate local bank branches.
Jian Tianlun: “China now has much demand for loans.
SME revenue will not improve by liberating loan interest
limits, nor will it ease competition among banks.
In the short term, who will benefit from this? It is large
state-owned enterprises, or the (local) governments."
For banks, the higher the risk,
the higher the loan interest rates.
Reducing loan interest rates will not bring benefits
for the less competitive and more risky SME’s.
They can still get usury loans from the shadow banks,
or illegal private banks, to maintain their livelihoods.
Professor Xie Tian, School of Business,
University of South Carolina- Aiken:
“Because of the monopoly of state-owned banks, it has
discriminatory polices towards SMEs and private companies.
No matter whether the lower limit of loan interest
rates are cancelled or not, they all find it very
difficult to get loans from state-owned banks.
Only if the finance is marketized, can SMEs get
money to solve their problems of shortage of money."
Although the central bank canceled lower limits
on loan interest rates, banks will not benefit
from the interest rate liberalization either.
The Wall Street Journal believes that if the banks don’t
lower loan interest rates, they will still have business.
Shadow banks will not be affected either.
Recently the explosive growth of shadow banking
showed that banks still have a chance to lend
money at a higher interest rate to new borrowers.
The Chinese authorities should draw a lesson.
As long as there are provisions, the market
will do everything possible to circumvent them.
At this time, investors should be wary of the new risks,
because of the suppression of China’s financial industry.
This includes corporate bankruptcies,
as well as government bailouts.
This may once again cause interest rates to soar.