Withapproval of the State Council, the People's Bank of China (PBC) decided towiden the floating band of lending rate of the financial institutions effectiveJanuary 1, 2004. For the commercial banks and urban credit cooperatives, theupper limit of their lending rate will be raised to 170 percent of thebenchmark lending rate set by the PBC. For the rural credit cooperatives, theceiling will be raised to 200 percent of the PBC's benchmark rate. The lowerlimit of the lending rate of all financial institutions will remain at 90percent of the PBC's benchmark rate. Take the one-year term loan for example,its current benchmark rate is 5.31 percent and commercial banks and urbancredit cooperatives are allowed to set their own lending rates within the rangeof 4.78 percent-9.03 percent on commercial basis after the widening of thefloating band. The floating band of the lending rates will no longer bedetermined based on the type of ownership and size of enterprises. Interestrates on loans provided by the policy banks and those specified by the StateCouncil will remain unchanged.
ThePBC will also lower the interest rate on the excess reserve of financialinstitutions from 1.89 percent to 1.62 percent effective December 21, 2003. Theinterest rate on the required reserves will remain at 1.89 percent.
Wideningthe floating band of lending rates of the financial institutions will help tocreate a fair market environment to fulfill China's commitments in WTOaccession; support the development of small and medium-sized enterprises andincrease employment; promote the reform of financial institutions; and dampenunderground lending activities charging unduly high interest rates to maintaina healthy financial market order. It will also help to reduce the imbalancebetween direct and indirect financing to foster development of capital markets.In the mean time, appropriately reducing the interest rate on excess reserve offinancial institutions will contribute to the smooth operation of the moneymarket and capital market and enhance the effectiveness of coordination betweenmacroeconomic policies.
Forthe moment, with sufficient supply of funds in the market, financialinstitutions have the capability of discriminating between different borrowersbased on their risk and profit profiles, and therefore the widening of thefloating band will not lead to an overall increase of lending rates.
Toensure the smooth implementation of these measures of interest rate reform, thePBC has made careful and comprehensive preparations, requesting all financialinstitutions to strengthen risk management system, improve their loan pricingmechanism, including setting the lending rate in a fair, equitable and openmanner based on factors such as the financing cost, the risk and performance ofthe borrowing enterprises. The PBC will enhance its monitoring, analysis andmanagement of the lending rate of financial institutions by strengthening itsrole in the provision of policy guidance and coordination.
