Beijing, China (4E) – The People’s Bank of China (PBOC) announced that it will remove all controls on lending interest rates and allow financial institutions to freely set rates.
China’s central bank said it will scrap a floor on lending rates currently at 70 percent of the benchmark rate, according to a statement published Friday. The PBOC also removed the cap on lending rates by rural credit cooperatives, although the move will not cover lending on mortgages and deposit rates.
The PBOC said on its website that the change, which will be effective starting Saturday, will lower financing costs of local businesses and enhance the allocation of financial resources.
Economists think that this is a major step for China’s financial sector toward having market-determined interest rates rather than set by the government. However, PBOC’s decision – aimed to lower borrowing costs by letting banks offer favorable rates to more credit-worthy borrowers – could lead to a small difference in the short term, some economists noted.
China has long maintained a floor for lending rates and a ceiling for bank-deposit rates, making the spread between the two artificially high. This policy gave state-controlled banks plenty of money to boost the rapid-growing economy, while also increased bank profits.
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