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  • The Chinese central bank is halfway towards liberalizing interest rates



    By icn.com

    The People`s Bank of China decided yesterday to remove the floor on lending interest rates to let the rate be decided upon demand and supply in the market and between different banks. Monetary policy makers left the ceiling on deposit rates and this is the halfway towards full rate liberalization.

    Chinese banks were guaranteed around 300 basis points spread whether they lent large corporations or small companies, but after the central bank`s decision this spread was eliminated. The bank left only one control tool, which is putting a maximum for interest rates on deposits, but removing it may take a long time and it won`t be before examining the effect of yesterday`s decision to complete the way to full rate liberalization. 

    It is obvious that such decision will reflect on the Chinese financial and banking sector over the medium and long term, and it will also affect companies and financial institutions that deal with the Chinese monetary system. 

    Moreover, the direct effect on Chinese banks will be forcing the banks to better assess risks and increase its lending to small and medium companies in order to increase margins. This will lead to better performance for the sector on the long term and less concentration on lending large corporations

    Concerning the exchange rate, we can say that this decision is a new step towards yuan internationalization. Liberalizing interest rates is the first step towards free exchange rates and encouraging the Chinese yuan to trade in global markets more effectively.


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