China banks to face more pressure

China's central bank late on Friday scrapped the floor on bank lending rates. Today is the first working day that markets, banks and analysts had time to react to this move. So far, feedback has been largely positive.

Some believe removing the floor signals a strong step towards full rate liberalization, which means taking out the ceiling banks can pay to depositors. Yin Hang finds out what the move means to Chinese banks as well as its depositors.

The People's Bank of China is giving lenders more freedom to set their interest rates. The move is expected to lead to the further liberalization of the country's interest rates.

Under the decision, China removes the longstanding lower limit for interest rates on loans. Economists say it marks an important step for the country's financial market.

"Over the past decades, China has made efforts to liberalize its interest rates, but it focused mainly on the fixed income or bank notes market, with fewer changes in bank lending rates. Because changing them, Chinese banks would face higher pressures. And the decision was made this time because all the conditions are mature. So it's a big reform." Lian Ping, Chief Economist, Bank of Communications said.

"The difficulty of interest rates liberalization is the deposits, which we need to work on from now on. The key to market-based reform is the interest rate regime. Interest rates should be set according to market principles, as commercial banks decide the interest rates together with their rivals by competition." Wang Guogang, Director of Inst. of Finance and Banking, CASS said.

But for Chinese banks this decision means fiercer competition and shrinking profits.

"Scrapping the lending rate floor means that the supply and demand between borrowers and lenders will follow the market rules in the future. So Chinese banks will feel more headwinds in the future. But giving that China's bank capital is still a scarce resource so far, the supply-and-demand balance is not to tip towards the borrowers too much. So the impact is limited." Lian Ping said.