China lifts controls on lending rates to halt economic slide

In a big liberalisation step, China today lifted controls on banks allowing them to set their own lending rates, a move to arrest slowdown and spur growth.
The removal of controls on lending rates is the first major economic reform launched under the government of President Xi Jinping, who assumed office this year.
The People's Bank of China said today it will further liberate lending interest rates for financial institutions so they can decide the rates themselves from Saturday.
The floor limit for lending interest rates will be cancelled and the financial institutions can decide their own rates following commercial principles, said in a statement.

Controls on bill discount rates will be scrapped and the ceiling limit for lending from rural banks will be eliminated.
However, the lending interest rates for personal homes will not be adjusted for the healthy growth of the property market, it said.

Lifting controls on lending interest rates can help cut costs for enterprises in raising funds and it can also optimise financial resources to boost the real economy and economic restructuring, the statement said.
The move to liberalise the interest rates came as the second quarter GDP declined to 7. 5 per cent amid speculation that Chinese conomy for the first time will miss official target of 7.5 per cent set for this year.

Officials admit that the economy may contract to below seven per cent by the end of this year.
Billed as the biggest move to halt the slowing down economy, the move to liberalise the interest rates is expected to make the economy more market-oriented.
Observers say the move was expected to wean away Chinese investors from shadow banking, which in recent years has grown on account of low interest rates offered by mainstream banks.
Yin Zhongli, a finance researcher with the Chinese Academy of Social Sciences, said cutting controls on the rates will allow small and medium-sized enterprises to have more access to lending.

Zuo Xiaolei, chief economist at China Galaxy Securities, said scrapping the controls is an important step toward interest rate marketisation. However, it is insufficient, as ceiling limit for deposit interest rates remains unchanged.
The financial institutions will not take solid moves to cut lending interest rates in the short term, she told state run Xinhua news agency.