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Lending rate change to spur private sector
2003-12-16
China Business Weekly
China's decision to ease credit regulations is being widely perceived as a major step towards the creation of a capital environment capable of spurring investments in the nation's fund-strapped private sector.
Raising the upper limit for lending is also considered a major move towards a freer, more market-driven banking system.
Still, experts suggest the changes might not take place in the near future.
The People's Bank of China (PBOC), the nation's central bank, might have to wait -- until the market is more mature -- to realize its goal, experts said.
"Sometimes, designs can be well-timed, but the outcome might be delayed," said Yi Xianrong, a financial economist with the Chinese Academy of Social Sciences.
PBOC announced last Wednesday that banks will soon be allowed to charge higher interest rates for commercial loans.
Beginning on January 1, banks and urban credit co-operatives will be allowed to set lending rates at 1.7 times the central bank's basic, or benchmark, rate.
Banks are currently allowed to charge up to 1.1 times the basic rate when lending to big companies, and up to 1.3 times when making loans to smaller firms.
The purpose of allowing high interest rates is "to establish a healthy interest-rate mechanism that is based on market demand, and to promote the healthy development of civilian economic growth," PBOC officials said.
Rule unlikely to have immediate effect
The new policy is widely believed to be in response to the call earlier this month by PBOC Governor Zhou Xiaochuan that more funds be channeled into China's non-State enterprises.
Those firms have become the base of China's huge job market.
"Many small non-State businesses crave loans. An interest-rate regime that better reflects lending risks will significantly help support their financial needs," Zhou told a high-profile industry forum.
State-owned banks have been reluctant to lend to private businesses, despite their surging growth, because the institutions have not been allowed to charge rates high enough to reflect their risks.
Most bank loans go to borrowers that present the least risks, or State-owned enterprises, which also tend to be large, but often inefficient.
Those enterprises often carry implicit government guarantees they will repay the loans.
Chinese Government statistics indicate, by the end of 2002, about 65 per cent of bank loans in the nation had been to State-owned companies.
Under the new rules, banks are expected to steer, in the long run, more loans to the private sector, as they will be allowed to charge higher interest rates.
Liberalizing interest rates has been a major goal for China's bankers for about a decade, and freeing up lending rates is considered an important, but difficult, step as monetary policy risks can considerably affect the nation's macroeconomy.
"The timing (for the interest rate change) is really good, because the money supply is now abundant," Frank Han, an analyst with Centergate Securities, told China Business Weekly.
"The lending rate change will not have a major, immediate effect on the market."
Lifting the upper limit of the lending rate is in the interest of all of China's banks, especially those hankering to list on the stock exchanges, experts said.
Gaining greater lending leeway will help China's banks generate more lending business to offset losses resulting from their bad loans to State-owned enterprises, experts suggested.
Lowering NPL (non-performing loan) ratios will definitely facilitate the banks' IPO (initial public offering) drives, experts added.
China should also help domestic banks sharpen their competitiveness before foreign banks flood the market and wage a fierce battle for market share, experts said.
In keeping with its commitments to the World Trade Organization (WTO), China must open its banking sector in 2006.
Giving local lenders greater freedom now will ensure they have ample time to manage their risks in a freer market environment, experts said.
Greater flexibility on interest rates, however, will not solve all the problems at Chinese banks, which are struggling to shed off piles of loans and to improve corporate governance, experts said.
"Corporate governance in China's banking industry is not well established," Yi told China Business Weekly.
"The central bank can design a nice roadmap for a sound banking system, but China's commercial banks might not be capable enough to adequately execute it."
Under the current system, banks will still have difficulty in rating precisely their risks when lending to private enterprises. They might still tend to opt for huge State-owned companies, since their loans can always be guaranteed by the government.
Some local governments act too much like designers that map out local economic development blueprints, and thus they intervene too much in the market, experts said.
Without changing the government's role in the economic system, banks will always offer most of their loans to State-owned firms, Yi said.
Lack of a sound credit-rating system will also hinder banks' efforts to provide more loans to private enterprises, particularly small businesses, as banks can hardly gauge their risks, experts said.
Widening the lending rate will result in a broader gap between deposits and loans, which will help banks make greater profits, experts said.
But the most difficult aspect of interest-rate reform will be raising the upper limit of the deposit rate while reducing the lower limit of the lending rate, which will help close the gap between deposits and loans that tests banks' ability to operate amid fierce competition, experts said.
Given the considerable market uncertainties, experts say it is hard to precisely estimate when the next step will be taken.
But they quickly acknowledge it will be a long-term process.
Li Yang, an economist with the Chinese Academy of Social Sciences, has said interest-rate reform will be achieved within 10 years.
If the government's intervention in capital allocation is not rooted out, overall interest-rate liberalization will not be realized, Li said.
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