China's rate reform points to eventual banking shake-up

Sun Jul 21, 2013 5:57pm EDT
 
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By Pete Sweeney and Gabriel Wildau

SHANGHAI (Reuters) - Beijing's move to scrap the floor on lending rates is not yet a game-changer for Chinese banks, but it may have just started the countdown to an eventual industry overhaul which will deprive the banks of virtually risk-free profits.

Any liberalization is seen as positive for China's financial sector and the world's second-largest economy. But many Chinese investors fear the nation's banks, which for years have made easy profits from state-mandated spreads between borrowing and lending rates, will struggle to benefit from more competition.

Reflecting such skepticism, the CSI300 financials index .CSI300FS trades at a low average price-to-earnings ratio of 8.42 and a price-to-book of 1.39, Thomson Reuters data shows.

Some economists believe nimble banks can reap some benefits after the People's Bank of China (PBOC) announced on Friday that banks could lend at any rate they wanted, enabling them to lure more business by offering lower rates.

However, with few loans extended at or near the just-scrapped official floor for lending rates, the change is seen as having little practical impact.

It could, though, be a prelude to a much bigger reform -- removing the cap on deposit rates, currently set at 3 percent for one-year deposits -- which would dismantle the system that enables lenders to effectively make guaranteed profit margins.

"China has removed almost all controls on lending rates, and rates in the money market and capital market are also effectively free. The next and more important step is, of course, the ceiling on deposit rates," said Wang Tao, head of China research at UBS in Beijing.

That may take some time. The central bank has made it clear it considered lifting the deposit cap as the "most risky" step and promised to proceed with caution and only after implementing various safeguards, including a deposit insurance scheme.   Continued...

 
A businessman looks at his mobile phone as he walks in the financial area of Pudong in Shanghai May 30, 2013. REUTERS/Carlos Barria