OREANDA-NEWS.  December 08, 2014. The PBC has decided to lower the benchmark loan and deposit interest rates for financial institutions.

Given the generally stable performance of Chinese economy, the benchmark loan and deposit interest rate reduction is designed to enable the benchmark interest rates to guide market interest rates so that the real interest rates will return to normal levels to reduce the financing cost for enterprises. The adjustment this time has adopted the asymmetric approach, expanded the floating range of deposit interest rates, and reduced the maturity brackets of benchmark interest rates, making innovation in the approach of macro-economic management and furthering the market-based interest rate reform. The PBC will continue the stance of sound monetary policy and further improve the normal adjustment mechanism of benchmark interest rates.

Q: What are the problems that the rate reduction this time is designed to resolve?

A: At present, the performance of Chinese economy remains within a reasonable range and adjustment of economic structure has produced positive results. However, in the real economy, the lack of access to financing and high financing cost are still two salient problems as complained by the economic agents. After the State Council launched a series of measures this July, and with large amount of work by the relevant departments, the lack of access to financing and the high cost of financing have been eased in some regions and some industries. As the downward pressure weighs on in the growth, the economy is moving on the upward slope in structural adjustment, and the enterprises are facing difficulties in business operation, some enterprises, in particular the small and micro enterprises, have lower capacity to accommodate the high cost of financing. It is thus of great significance to solve the problem of high financing cost for enterprises, especially for the small and micro enterprises in order to achieve stable growth, promote job creation and improve people’s welfare. The rate reduction this time focuses on enabling the benchmark interest rates to guide market interest rates and financing cost of the real sector to move downward, so that the real interest rates will gradually return to normal levels to ease the high financing cost of enterprises and provide a neutral and appropriate monetary and financial environment to support sustainable economic development.

Q: Does the interest rate cut signal a shift in the stance of monetary policy?

A: The interest rate adjustment this time is a neutral operation and does not indicate a stance in the orientation of monetary policy. At present, performance of the Chinese economy is still within a reasonable range and the rate of CPI inflation has fallen back, thus the central bank needs to use interest rate tools flexibly to conduct fine-tuning in view of the operation of fundamentals, to keep real interest rates at appropriate levels. This measure is a necessary move in our efforts to improve normal interest rate adjustment mechanism and to make the sound monetary policy more targeted and effective. In the complex international environment, although the Chinese economy faces some downward pressure, there is still considerable room to promote coordinated progress in industrialization, the application of IT technology, urbanization and modernization of agricultural sector and the risk resilience of the economy is strong given the large size of the Chinese economy. In general, with growth rate remaining within the range of medium to high level, the rate of CPI inflation declining, and the continued progress in structural adjustment, the economy is moving from investment driven to innovation driven growth. Therefore, it is not necessary to adopt strong stimulus measures and the sound monetary policy will not change.

Q: This round of rate adjustment is combined with the measures to further market-based interest rate reform. What are the new measures?

A: As shown in China’s past experience, in order to respond to the current complex situations at home and abroad and promote sustainable and stable growth of the economy, the key is to inject impetus to the economy by deepening reform, promote development through further reform, and unleash dividends of reform thoroughly. In recent years, the market-based interest rate reform has made continuous progress. At the moment, the PBC only retains control over the upper limit of deposit interest rates. As the market-based interest rate reform further deepens, the market interest rate mechanism and transmission mechanism are gradually improved, financial institutions have improved corporate governance and built stronger capacity in risk control, the basic conditions are available for further steps in market-based interest rate reform. This round of policy adjustment is designed to combine monetary policy measures with reform measures, to integrate reform with macroeconomic management, to make innovation in method of macroeconomic management, and to further market-based interest rate reform. Specifically, the reform measures are taken in the three aspects:

First, the benchmark loan and deposit rates were lowered in an asymmetric way. The reduction of benchmark loan rates was larger than that of benchmark deposit rates. This was an improvement of traditional interest rate adjustment mode and aimed to guide the downward movements of market interest rates and social financing cost in a more targeted way. The benchmark loan interest rates still have significant implications for the pricing of financial products. The substantial cut in benchmark loan interest rates this time will directly lower the loan pricing benchmark and help lower the price of bonds and other financial products. In the meantime, the PBC has asked financial institutions to set store by the overall need to promote economic and social development, earnestly assume their social responsibility, stick to the principle of serving the real economy, following the orientation and implement policies on macro-economic management, determine the loan interest rates in line with adjustments in benchmark rates, and guide financial institutions to lower the corporate financing cost through the self-regulatory pricing mechanism for market interest rates. From the perspective of deposit interest rates, the moderate decrease in benchmark deposit interest rates combined with a larger floating range will help maintain the positive deposit rates at appropriate levels, protect the rates of return for depositors, help expand consumer spending, and boost domestic demand.

Second, the upper limit on the floating range of deposit interest rates was enlarged from 1.1 to 1.2 times benchmark deposit rates. This is another important step in the market-based interest rate reform after the upper limit on the floating range of deposit rates was raised to 1.1 times the benchmark deposit rates in June 2012. As a result of the enlargement of deposit-rate floating range, when commercial banks take full advantage of the enlarged band, the highest deposit interest rates will be the same as those prior to the adjustments. Meanwhile, financial institutions will have larger room for independent pricing, which will help improve their market-rate pricing mechanism, enhance the independent pricing capacity of financial institutions, accelerate the transformation of their business models, and improve the financial services. Furthermore, it will help improve the market-based interest rate regime, and let the market play a decisive role in resource allocation.

Third, maturity brackets of benchmark loan and deposit interest rates were simplified and consolidated. After taking into consideration the use of maturity brackets of benchmark rates, the maturity brackets of loan and deposit interest rates were both simplified and consolidated. The PBC will no longer publish the 5-year time deposit benchmark rate, and has simplified the benchmark lending rates into three brackets, i.e., the 1-year or less, over 1 year and up to 5 years, and over 5 years. This will further expand the space of independent pricing for financial institutions, guide financial institutions to transform their business philosophy, and improve the market-based pricing capacity. Besides, it will also strengthen the market base interest rate system, improve the policy rate transmission mechanism, and create favorable conditions for further market-based interest-rate reform.

Q. How will market-based interest rate reform be further promoted in the next step?

A: With continuous progress for more than a decade, China’s market-based interest rate reform has made significant achievements. In particular, since the 18th CPC National Congress, new measures have been adopted in relaxing interest rate control and improving the market-based interest-rate regime. A higher upper limit on deposit rates will give the market a decisive role in determining interest rates, and also lay a solid foundation for full liberalization of deposit rates in the future. Besides, the simplification and consolidation of maturity brackets of benchmark rates will help financial institutions develop and strengthen their pricing capacity to adapt to the market-based interest-rate regime, and let the market play a decisive role in resource allocation. Going ahead, the PBC will closely monitor the effect of various market-based interest rate reform measures, and in view of economic and financial developments in domestic and foreign markets and the available conditions for further reforms, launch large-value certificates of deposit (CDs) tailored to enterprises and individuals, and continuously advance the market-based deposit rate reform in an orderly manner. Furthermore, the market-based interest rate regime and transmission mechanism will be improved, so as to enhance the capacity of central bank interest rate adjustment and the effect of macroeconomic management.

As the market-based interest-rate reform is a systematic project, we will coordinate it with other reforms to seek balanced progress. To this end, efforts should be made to strengthen coordination of various reforms, to form the synergy of reforms, and to eventually build a system of mechanisms to give the market a decisive role in resource allocation and let the government play a better role.