Money

Lenders still on a strong footing: Economists

By Wang Bo and Xin Zhiming (China Daily)
Updated: 2010-09-04 09:14

Stacks of currency ready for storage at a bank in Hai'an, Jiangsu province. [Xu Jinbai / for China Daily]

Interest rate fluctuations to have little impact on profit margins

CHANGCHUN - Higher interest rates on bank deposits will not have much of an impact on Chinese lenders, a senior government think-tank economist said on Friday.

"Even in 2008, when the deposit rates were the highest, the impact on the banking sector was very negligible," said Wang Guogang, director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

"Even if an adjustment is made now, it is unlikely to impact the lenders," he said.

Wang's comments follow recent reports that the central bank was considering a flexible interest rate plan to improve the credit structure and lending efficiency of banks.

Sheng Songcheng, head of the People's Bank of China's Shenyang branch, had on Tuesday suggested that the floating mechanism should be started on a trial basis in the country's northeast provinces.

The remarks were interpreted as a signal that the authorities are considering a flexible interest rate regime to replace the existing fixed rate mechanism. At the same time it also triggered concerns that such a move would reduce the profit margins of lenders.

Xia Bin, senior economist of the State Council's Development Research Center and advisor to the central bank, had last month indicated that the central bank should be thinking on the same lines. "China should consider allowing the deposit rate to float at an appropriate time," he said.

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"Banks could adjust their rate structure in line with the changing situation," Wang told China Daily on the sidelines of the High Level International Financial Conference. "Even the worst financial crisis (in 2008) failed to batter the Chinese banks."

China's deposit rate was 4.14 percent for most of 2008, the highest since August 1996. However, the banking sector achieved a more than 30 percent growth in net profit in 2008, according to the China Banking Regulatory Commission.

Lenders have often been criticized for making hay from the big difference between the interest rates for deposits and lending, especially when inflation has exceeded the one-year benchmark savings rate in the past seven months. China's consumer price index climbed 3.3 percent in July, the highest in the past 21 months while the savings interest for one-year deposits is 2.25 percent.

Currently, the interest rates for deposits and lending are controlled by the government and the gap between deposit and lending interest rates often gives banks incentive to lend more, analysts said.

Floating deposit rates will break the monopoly of banks and help in better resource allocation, said some economists.

But a growing section also feel that the timing is not right for revamping the interest rate regime, as it is an irreversible trend in the long run.

Lian Ping, chief economist at Bank of Communications, said despite the ample liquidity, money supply in the bank deposit market is still tight.

Chinese banks are bolstering their capital base and setting aside more money as provisions after the record lending spree of last year. "Higher deposit rates will increase the credit costs for banks and hurt them as the economy is slowing and the government is taking measures to curb credit growth," said Lian.