Long-Term Interest Rates Rise In China

Cash crunch round two may be coming in the fall, if the trend in deposit rates is any signal.

Medium-, long-term deposit rates increase

More commercial banks are offering the highest rates legally allowed for medium- and long-term yuan deposits as competitive and liquidity pressures intensify.

......The central bank's recent move to abolish the lending rate floor, which was 70 percent of the benchmark rate, reconfirmed policymakers' determination to push financial sector reform, which is expected by the market. It is also an essential step to the liberalization of interest rates.

The scrapping of the loan rate floor won't have much impact on bank lending rates, as banks don't compete on loan pricing and rarely lend at the floor rate. Therefore, the real economy may not get lower funding costs, and economic growth may not benefit much from this move, according to a recent Barclays Research report.

Before the abolition of the rate floor, benchmark loans cost 6 percent to 6.55 percent, according to PBOC data.

Removal of the savings rate cap, which has been widely discussed, may take more time, said analysts. "We believe the deposit rate ceiling move is a key and risky step for interest rate liberalization and it will have an impact on banks' behavior and banks' net interest margins," said May Yan, an analyst with Barclays Research.