Reforms on complete deregulation of interest rates move ahead in China

​Last week the State Council approved an amendment that removes the required loan-to-deposit ratio of commercial banks. Under current law, the loan stock of a bank may not exceed 75 % of its deposit stock, thereby limiting the bank’s ability to lend. In March, the ratio for the banking sector averaged 66 %, although many banks were near the 75 % ceiling. The change is expected to take effect next year and is likely to reduce lending costs and promote market-based pricing.

The deposit insurance scheme implemented at the start of May is considered a prerequisite for ending rate regulation. Moreover, from the start of June, banks are allowed to issue certificates of deposits (CDs) to private investors and non-financial institutions. At this point, the arrangement is only available to large investors that invest enough to meet minimum requirements. Earlier trading in CDs was only possible on the interbank market. All of China’s largest banks have emitted new CDs, which can be priced freely and are not subject to deposit interest rate restrictions.

The range in which banks can offer deposit interest rates relative to the central bank’s reference rate has gradually widened so that the current ceiling is 150 % of the reference rate. As there is little reason to increase flexibility, the next step is likely to be elimination of the ceiling altogether. Lending rates were deregulated in 2013, when also the lower limit on deposit rates was eliminated. According to central bank governor Zhou Xiaochuan, complete deregulation of interest rates will likely happen before the end of this year.