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China unlikely to liberalise lending rates in 2009.

Summary: BEIJING - Fears over the impact on bank earnings are likely to delay a long-awaited liberalisation of Chinese interest rates, even though it would lower borrowing costs and give a boost to the world's third-largest economy.

Zhou Xiaochuan, governor of the People's Bank of China, said during the recent session of parliament that the central bank would study a plan to let banks charge less for loans; currently, lenders may offer a discount to benchmark rates set by the PBOC of no more than 10 percent, a favour enjoyed mainly by big firms.

But the research could take a year or more.

Analysts say the central bank is unlikely to be in a hurry because banks face a squeeze on their net interest margins and a possible rise in bad loans from the slowing economy.

Lowering the minimum lending rate would further compress interest income, which is the lifeline of every bank in China despite increasing efforts to diversify revenue streams.

"As far as we know, it's impossible to implement under the current circumstances," Yang Qingli, head of research at BOCOM International in Hong Kong, said of Zhou's intention.

China started to liberalise interest rates in 1996 and abolished the ceiling on lending rates in October 2004, encouraging banks to charge more for riskier credits.

But the state still ensures a built-in margin for banks to prevent ruinous competition in a sector only recently nursed back to rude health through a $500 billion multi-year bailout.

In addition to the floor on lending rates, banks may offer depositors no more than benchmark rates set by the PBOC. For the one-year maturity, this is 5.31 percent for loans and 2.25 percent for deposits.

Removing these restrictions is a goal of the ruling Communist Party's five-year plan for the period 2006-2010, but Yang said the central bank might miss the deadline.

Big Impact

Wu Yonggang, a senior financial analyst at Guotai & Junan Securities in Shanghai, said the floor rate was unlikely to be lowered this year.

"The impact on banks would be huge," he said.

Banks are already steeling themselves for margin compression.

Industrial and Commercial Bank of China 1398.HK 601398.SS, the world's biggest lender by market capitalisation, enjoyed an increase in its net interest margin to 2.95 percent in 2008 from 2.8 percent in 2007.

But ICBC says it expects market-oriented reforms of interest rates to erode the margin this year, hitting profits.

Analysts Nick Lord and Sarah Wu at Macquarie Securities said net interest margin at Bank of China 3988.HK 601988.SS, the fourth-largest bank, was likely to be more resilient than that of its peers.

But they forecast in a report that the margin, at the group level, would still shrink a further 31 basis points this year following a drop of 13 basis points in 2008 to 263 basis points.

Beijing has been using home loans to test the reduction in minimum lending rates.

Last October, the central bank allowed mortgage lenders to start charging as little as 70 percent of the central bank's benchmark rates, down from 85 percent, in order to boost housing demand.

However, some banks, especially big ones, have dragged their feet. ICBC did not lower its rates until February, according to state media.

Because of the heavy weight of banking shares in China's benchmark stock index .SSEC, any further policy shift that would hurt bank earnings would spook the share market, said Zhao Qingming, senior economist at China Construction Bank in Beijing.

That prospect alone militates against such a move this year, when a string of sensitive political anniversaries is putting an even greater premium than usual on the need for social stability.

"The only benefit of lowering the floor rate is to cut fund-raising costs and help protect 8 percent GDP growth this year," Zhao said.

Big firms, especially those backed by the government, already enjoy growing access to cheaper funds through the bond market, where yields are much lower than on bank loans.

However, China's bond market is still immature and unable to meet corporate financing needs.

"When the bond market is fully developed, the floor on lending rates will be eliminated naturally," said Jing Xuecheng, a former central bank researcher.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:9CHIN
Date:Apr 2, 2009
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