**Abstract**
With the approval of the State Council, the People's Bank of China announced on July 20 that it would fully liberalize the control over lending rates for financial institutions. This move removed the lower limit of 0.7 times the benchmark loan interest rate, allowing financial institutions to set their own rates based on commercial principles. The central bank also abolished the control over bill discount rates, shifting the method of determining such rates to be based on rediscount rates, which are now decided independently by financial institutions. Additionally, rural credit cooperatives will no longer have an upper limit on their loan interest rates, promoting more flexible and risk-based pricing. Meanwhile, the floating range for personal housing loan interest rates will remain unchanged to support the continued implementation of differentiated housing credit policies and ensure the stable development of the real estate market.
This reform marks a significant step forward in China’s interest rate liberalization process. The gradual progress in making interest rates market-driven is expected to enhance the role of markets in resource allocation, strengthen financial support for the real economy, and contribute to broader economic restructuring and transformation.
**The Timing of Reform Is Basically Mature**
In late May, the State Council approved the National Development and Reform Commission’s “Opinions on Deepening the Reform of the Economic System in 2013,†emphasizing the need to steadily advance the market-oriented reform of interest rates. Within just two months, the central bank made notable progress in this area. However, the journey toward interest rate marketization has spanned over 17 years, laying a solid foundation for further reforms.
Since 1996, the central bank has gradually relaxed interest rate controls while working to improve the market-based pricing mechanism. Today, only the upper limit of deposit rates and the lower limit of loan rates are still managed by the central bank, with most other rates already market-determined. In 2012, the central bank expanded the floating ranges for both deposit and loan rates, raising the deposit rate ceiling to 1.1 times the benchmark and lowering the loan rate floor to 0.7 times the benchmark.
According to officials, the macroeconomic environment is stable, and micro-level conditions—such as improved financial institutions’ pricing capabilities and greater adaptability from enterprises and residents—are favorable for further reform. Additionally, the development of benchmarks like the Shanghai Interbank Offered Rate (Shibor) and improved policy transmission channels have created a solid base for continued progress.
**Conducive to Structural Transformation**
Despite overall stability in the financial system, inefficiencies in fund allocation persist. As of the end of June, the broad money supply (M2) reached 105.45 trillion yuan, yet many funds did not flow into the real economy. This has contributed to risks such as local debt expansion and shadow banking, while also fueling inflation and asset price increases. A large portion of capital has flowed into real estate and industries with high pollution and overcapacity, exacerbating structural imbalances.
Recent interbank market disruptions highlighted the issue of idle funds within the financial sector, underscoring the need to revitalize capital and optimize financial resource allocation. Interest rate liberalization is seen as a key driver for achieving this goal and supporting broader economic restructuring.
After removing the lower limit on loan rates, financial institutions and borrowers will have more flexibility in setting prices. This will allow banks to adopt differentiated pricing strategies, reduce corporate borrowing costs, and improve service quality. It will also encourage businesses to explore alternative financing channels, helping to develop direct financing markets and diversify social financing.
For rural credit cooperatives, the removal of the loan rate ceiling enables them to price loans based on risk and income considerations, improving their willingness to provide agricultural loans and enhancing rural financial services.
**Steadily and Orderly Advancing Reform**
Zhou Xiaochuan, the former governor of the central bank, emphasized that China is still a transitional economy with complex operating conditions and an imperfect monetary policy transmission mechanism. Therefore, the reform must be planned and implemented step by step.
While the reform has not yet touched deposit rates, the central bank noted that this is due to the higher requirements and broader implications of such a move. Although corporate governance in financial institutions has improved since 2003, full implementation remains a work in progress. The deposit insurance system and exit mechanisms are still being developed.
Moving forward, the central bank plans to continue refining the market-based interest rate formation mechanism, optimizing the benchmark interest rate system, and enhancing the independent pricing capabilities of financial institutions. The goal is to expand market-based pricing across more debt products and let the market play a more fundamental role in allocating financial resources.
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