Jan 07, 2019 (China Knowledge) - China is expected to further liberalize the setting of domestic interest rates by allowing financial institutions to decide their own interest rates for loans and deposits that are more in line with market trends and their own financial goals instead of tying them to the official benchmark rates set by the central bank.
The latest change comes amid an announcement from the central bank regarding a cut in bank’s reserve requirement ratio by 100 basis points this month ahead of the upcoming Lunar New Year holidays to ensure sufficient liquidity.
Despite the liberalization, financial institutions will still likely follow the benchmark rates set by the central bank due to the difference between deposits and loans that it sets which will ensure a healthy profit margin for the bank.
Currently, the benchmark interest rate for one-year loans is 4.35% while that for one-year deposits is 1.5%, remaining unchanged since October 2015. The large differential in interest rates makes it difficult for banks to set their own rates and the central bank should look to reduce this differential if it really wants to give banks more autonomy in interest rate setting.
Due to the low deposit interest rates, new investment products such as smart deposits have been created by smaller banks which offer higher interest rate returns that have a riskier underlying.
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