PRC Landmark: Interest Rate Liberalization by 2016

♠ Posted by Emmanuel in at 3/11/2014 10:11:00 AM
There is an ugly term economists have for deposit rates being lower than the rate of inflation: financial repression. The other term, negative real interest rates, is marginally better. For a long time, China's extremely investment-heavy growth has been conditioned on giving depositors poor returns on their savings, while lending money to (usually state-affiliated) enterprises at concessional rates.

With many investments not bearing fruit and polluting the Chinese environment besides, there has been a large rethink of this duality. With CCP bigwigs currently setting economic policy in Beijing for the next few years, one of the most notable changes promised is full-liberalization of interest rates in two years' time. That is, banks will be able to offer depositors higher rates, which in turn will mean borrowers will have to grow accustomed to a semblance of risk-based pricing of loans. From China Daily, still our favorite official publication after all these years:
China is set to fully liberalize its interest rate within one or two years, in a bid to further reform the financial sector, the Central Bank governor Zhou Xiaochuan said on Tuesday at a news briefing during the two sessions.

"We will let the market play its due role in interest rate liberalization. That's for sure," Zhou said. "Deposit rate is set to ease within one or two years. It's part of our plan." He added that interest rates will possibly go up, but will eventually level in the longer term due to market forces and competition.
Interest rate liberalization is but one part of an expected set of reforms to make China's economy more market-based:
Financial reforms, including yuan globalization, banking regulations, private equity, debt risks control, will be launched with zeal, although some steps may take three or five years, Zhou said. The country has stepped up its efforts to push for economic reforms in recent years, rolling out a slew of measures and regulations in the process.

"Reforms in other fields, including rural reforms, resource distribution and economic opening-up, will also involve financial reforms," Zhou added. "We will get them done step by step." 
It's about time is all I can say.

UPDATE: MarketWatch suggests that the emergence of online banks in China offering higher placement rates is driving this change as state-owned banks have felt the sting of withdrawals:
And for those awaiting marketization, they may owe a big thank you to the Internet companies. Why? Just several days ago, state media quoted Zhou as saying that China would not ban wealth management products from online providers, such as Yu’e Bao (a high-yield online investment product offered by e-commerce giant Alibaba since June, which can be easily accessed via smartphones) despite the recent controversy created by those products.

The rapid rise of Yu’e Bao and other similar products have generated hot debate, as tens of millions of ordinary Chinese savers have withdrawn their bank deposits and flocked to such Internet finance products that offer higher deposits rates.

According to Yu’e Bao’s statistics, it had attracted over 250 billion yuan ($41 billion) in assets and 490 million clients as of mid-January. And as of late-February, the number of clients had grown to above 810 million, while a Xinhua news report out Tuesday said assets had doubled to 500 billion yuan.
 SCMP also agrees that online banking is helping drive this liberalization.