Lending rate liberalization and next steps
Comment of the Day

July 19 2013

Commentary by Eoin Treacy

Lending rate liberalization and next steps

Thanks to a subscriber for this note covering today's move by the PBOC to remove the lending floor for China's banks. The full note is posted in the Subscriber's Area but here is a section
In addition to the removal of the lending rate floors, the rate controls on bill discounting and the lending rate caps on rural credit cooperatives are removed. This should help slightly improve the availability of funding for smaller companies.

It is clear to us that the government is accelerating the pace of financial reforms, and we expect many more steps in the second half of this year. Possible actions in the near term include: permitting banks to issue CDs, which will help banks to reduce their maturity mismatch; reducing the reserve requirement for smaller banks; reducing the number of benchmark rates; and introducing the QDII2 scheme, which will permit more overseas investments. Overall, we believe that a reduction the reserve requirement for small banks would be received positively by the market as policy easing, and capital account liberalization should benefit brokers and FX banks.

Eoin Treacy's view While these measures can be viewed as short-term bearish for the banking sector, the medium-term outlook is more positive because they represent a step on the road to monetary easing which has been a missing catalyst for the Chinese stock market.

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