Loan growth deceleration and interest rate liberalization

  • Monday, January 17, 2011
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  • Keywords:interest Rate
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Loan growth deceleration and interest rate liberalization

Mr. Guo Tianyong pointed out that banks have relied too much on volume growth. As a result, a lot of capital has been consumed and, therefore, some banks will have to raise capital again in 2011. He thinks that M2 growth should slow to 15% this year, compared with 20% last year. He believes that lending to the service sector, SMEs, agriculture and emerging industries will increase while lending to real estate and LGFVs will be curtailed. The banking sector, in general, suffers from lack of competition and its profit margin is excessively protected. Mr. Tianyong said that Chinese banks are moving towards universal banking by owning more securities and insurance subsidiaries. He believes that listings of city and rural commercial banks will be supported by policy makers in 2011.

The interest rate liberalization is likely to progress this year. Mr. Yang Zaiping of the China Banking Association mentioned that current controls on interest rates lead to rent-seeking activities (corruption) and misallocation of capital. The banking association has already made a proposal on interest rate liberalization to policy makers. The association believes that interest rate liberalization should start with large deposits, CDs and wealth management products (e.g. structured deposits), and gradually move towards other types of deposits. Banks that offer the right incentives and are well capitalized are likely to be first allowed to participate in the rate liberalization program. Over the medium term, interest rate liberalization will inevitably reduce the NIM for the banking system.

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