Banks in China may be imposing limits on the pricing of funds, but that's an internal decision and it doesn't mean the government is taking back control of interest rates, a newspaper associated with the Chinese central bank said on Monday.
The government is still pursuing interest-rate liberalization, it said.
The central bank emphasized on late Monday afternoon that it has been always pushing forward the liberalization of interest rates and will continue to do so, according to a post published on its website.
Self-imposed restrictions are essentially different from government controls over interest rates, according to an editorial published on Monday by Beijing-based newspaper Financial News, owned by the People's Bank of China (PBOC).
A recent media report has suggested that China may reimpose ceilings on deposit and loan rates, which would be as a step backward in the nation's financial reforms.
The Tokyo-based Nikkei Asian Review reported on June 24 that starting with banks in Beijing, some loan rates could not be set lower than 90 percent of the central bank's base rate of 4.35 percent on 1-year loans. It also said that deposit rates had been capped at 130 to 140 percent of the PBOC's benchmark 1.5 percent rate.
According to the editorial in the Financial News, government controls are a binding constraint on price discovery in the financial market, while self-imposed restrictions can be viewed as self-discipline in the banking sector on lending rates.
Two other factors determine whether there are still government controls over interest rates in China. One is whether benchmark interest rates are still set by the PBOC. The other is whether the central bank also imposes ceilings and floors on loan rates, Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Monday.
"The era of following administrative orders ended on October 24, 2015, when the central bank removed deposit interest rate ceilings," he said.
China will continue to pursue a market-based interest-rate mechanism and strengthen self-discipline in the formation of market interest rates to grant financial institutions more discretion in setting interest rates, according to the China Financial Stability Report published by the PBOC on June 27.
The Nikkei Asian Review said in its report that resuming limits on interest rates is meant to encourage write-offs of the nation's increasing pile of nonperforming loans.
"It's hard to know if the report is true. If so, [China has] definitely put financial liberalization on hold," Dong noted.
Self-imposed restrictions would be in line with the process of liberalizing interest rates, which include different benchmarks such as the Shanghai Interbank Offered Rate and short-term money market rates, the Financial News said.
To promote this liberalization, 12 banks including the four largest by assets - Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China - were selected as core members in this practice, according to a list published by the China Foreign Exchange Trade System, which is run by the PBOC, on June 22.
