By Kevin Yao and Jason Subler

China's central bank removed controls on bank lending rates, effective Saturday, in a long-awaited move that signals the new leadership's determination to carry out market-oriented reforms.

The move gives commercial banks the freedom to compete for borrowers, a reform the People's Bank of China said on Friday will help lower financial costs for companies. Previously, the lending floor was 70 percent of the benchmark lending rate.

However, the PBOC, in a statement, left a ceiling on deposit rates unchanged at 110 percent of benchmark rates, avoiding for now what many economists see as the most important step Beijing needs to take to free up interest rates.

The latest step underscores Beijing's resolve to start fixing distortions in its financial system and the economy more broadly as it tries to shift from export- and investment-led growth to more consumption-led activity.

Some analysts said cheaper credit could help support the economy, which has seen year-on-year growth fall in nine of the last 10 quarters.

"This is a big breakthrough in financial reforms," said Wang Jun, senior economist at China Centre for International Economic Exchanges, a prominent government think-tank in Beijing.

"Previously, people had thought the central bank would only gradually lower the floor on lending rates. Now they scrapped the floor once and for all."

The Australian dollar rose modestly on the news on hopes cheaper credit will lead to more demand from Australia's biggest export market.

The announcement provided some support to weak stock markets in Europe and a timely reminder to the world's top financial leaders meeting in Moscow of China's intention to rebalance its economy.

A Group of 20 draft communique will urge China to encourage more domestic demand-driven growth as part of wider efforts to rebalance the world economy, G20 sources said.

The United States welcomed the move, saying China promised to let markets play a bigger role in allocating credit during the U.S.-China Strategic and Economic Dialogue in Washington last week.

"This is a welcome further step in the reform and liberalisation of China's financial system," Holly Shulman, a spokeswoman for the U.S. Treasury, said in an email.

Signal of resolve

China's big lenders, such as Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd and Agricultural Bank of China Ltd, have generally resisted interest rate reforms because they do not want to see their rate margins get squeezed.

But many economists say such a push is necessary so that lenders learn to better price risk, which will force them to allocate capital more efficiently and so help rebalance an economy saddled with overinvestment and overcapacity in sectors from cement to steel making to solar panels.

Scrapping the lending floor will likely cut borrowing costs for businesses and individuals, ending what many observers say had been artificially high rates that benefited state lenders at the expense of private enterprise.

Some economists were sceptical at how much direct economic impact the move would have because few banks have fully utilised the limited freedom they already had to charge interest rates slightly below benchmark rates, choosing instead to keep their rates slightly above the floor that has been in place.

"So the move may have more of a signalling effect than transmit immediately to the economy but it is an important signalling effect," said Manik Narain, emerging market strategist at UBS in London.

However, to the extent that it does lead banks to lower their lending rates, the move could serve to stimulate investment at a time when the world's second-largest economy is running around its lowest growth rates since 2009, having logged 7.5 percent growth in the second quarter.

More important, though, is the sign that policymakers are getting serious about tackling challenging reforms, just four months after Premier Li Keqiang took office, analysts said.

"This is one of the biggest steps they could have taken," said Mark Williams, chief Asia economist at Capital Economics. "It tells you something about the trajectory."

The need for financial reforms was put on full display in late June, when the central bank attempted to choke off funds flowing to "shadow banking" activities, leading to a crunch in the country's money markets that sent short-term borrowing rates to levels normally seen only during financial crises, prompting jitters among investors around the world.

The shadow banking sector, or non-bank lending, has ballooned in recent years, raising concerns that authorities are losing track of potential bad debts building in the economy.

Long path ahead

The central bank said it is also scrapping controls on rates on discounted bills, a common form of payment among companies.

The PBOC made clear in its statement it does not intend to ease up on its controls over mortgage rates. Beijing has been clamping down on the property sector for several years to try to keep a lid on rising prices and speculative buying.

It said it planned to free up deposit rates eventually but now was not the right time. It said it still needed to do more groundwork, which is expected to include launching a deposit insurance system, something many observers expect may happen this year.

"(Reform of deposit rates) is more difficult and more sensitive. We should not expect it to happen very soon," said Yu Yongding, former member of the central bank's monetary policy committee and a researcher at the Chinese Academy Of Social Sciences in Beijing.

Beijing worries that allowing banks to raise deposit rates to compete for funds could crush some smaller lenders and force them to go bust.

Longer term, the latest move could signal that the government will step up other reforms seen as necessary to help rebalance the economy.

"This underlines that China is moving to a fully convertible currency and floating exchange rates," said Flemming Nielsen, senior analyst at Danske Bank in Copenhagen. "Their next step will be to widen the daily trading band for RMB (yuan). They should do that within the next three months."

央行全面松绑贷款利率，迈出利率市场化改革关键一步

中国利率市场化改革迈出关键一步，除个人住房贷款利率浮动区间暂不作调整外，央行宣布全面放开金融机构贷款利率管制。分析人士认为，贷款利率彻底放开在利率市场化改革中具有里程牌意义，体现了中国政府在推进利率改革的力度和决心。

他们并指出，此举将让不同的金融机构提供差异化服务的空间更大，也给金融机构提供了一个更公平的竞争环境，有助于金融资金流入实体经济，相当于盘活存量的一个比较实在的举措；不过央行并未同步放开存款利率管制令市场略感失望，也显示其循序渐进和谨慎的政策意图。

“贷款利率的彻底放开是利率市场化改革中具有里程牌意义的一步，有利于利率市场化改革的最终完成。”光大银行首席宏观分析师盛宏清称，“也将进一步推进企业调整自己的融资结构，各家银行更充分地发挥自己的竞争优势和活力。”

他并指出，贷款利率的完全市场化一定也将反射到存款利率上，将切实提高居民存款的收益率。现在银行间市场的利率和流动性处于紧平衡的状态，资金利率和贷款几乎重合，说明现在正是推贷款利率市场化的好时机。这样一来，无论是票据、债券还是贷款融资，都是平等的。

中国人民银行周五宣布，进一步推进利率市场化改革，将自7月20日（周六）起全面放开金融机构贷款利率管制。不过，为继续严格执行差别化的住房信贷政策，促进房地产市场健康发展，个人住房贷款利率浮动区间暂不作调整。

而招商证券宏观研究主管谢亚轩指出，此次改革比想象中的步子更谨慎一些，原来预计存贷款利率都会进行改革，但此举也说明改革循序渐进和谨慎的政策意图。

对此央行表示，此次改革没有进一步扩大金融机构存款利率浮动区间，主要考虑是存款利率市场化改革的影响更为深远，所要求的条件也相对更高。而从国际上的成功经验看，放开存款利率管制是利率市场化改革进程中最为关键、风险最大的阶段，需要根据各项基础条件的成熟程度分步实施、有序推进。

央行并指出，全面放开贷款利率管制后，金融机构与客户协商定价的空间将进一步扩大，有利于促进金融机构采取差异化的定价策略，降低企业融资成本；将有利于金融机构不断提高自主定价能力，转变经营模式，加大对企业、居民的金融支持力度；有利于优化金融资源配置，更好地发挥金融支持实体经济的作用，更有力地支持经济结构调整和转型升级。

Follow us on Twitter: @ALB_Magazine.