Removing deposit interest rate ceiling: a first step – Sara Hsu

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Sara Hsu

Sara Hsu

Financial reforms seem to get on its way, as China removed last week the deposit interest rate ceiling. Financial analyst Sara Hsu calls it in the Diplomat a milestone in the promised financial changes.

Sara Hsu:

This move was expected to take place sometime this year or next year if economic conditions allowed. The removal of deposit rate restrictions marks a milestone in the trajectory of financial reform, paving the way for further financial marketization and enhanced funding opportunities.

The action by the central bank ends a long period of restricted interest rates. Even though the People’s Bank of China has stated that it will closely monitor interest rates, this is an important step toward allowing banks’ interest rates to reflect market conditions. In China, banks play a central role in the financial sector, and liberalization of interest rates in the banking sector will improve market signals in other financial subsectors, including the nascent corporate bond market and the curb market. Removal of deposit rate restrictions will also improve banks’ capacity to compete with the shadow banking sector, which offers somewhat higher returns on wealth management products.

Removal of the deposit rate ceiling, coupled with benchmark interest rate cuts and reductions in the required reserve ratio, boosted Asian stock markets to some extent. While analysts have pointed out that current economic conditions are unlikely to create vicious competition among banks for deposits or to improve liquidity conditions, this may change in the medium run, as banks’ profit margins improve and growth is renewed. Improving the climate for competition in the banking sector may allow other banks to break through the oligopoly imposed by the Big Four commercial banks.

More in the Diplomat.

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