China liberalizing its financial system?

By Ricardo Rivera August 31, 2015

rrivera@ufm.edu

Translated from Spanish by Andrés Contreras

 

Interest rate policy in China is decided by the Monetary Policy Committee of The People’s Bank of China (PBOC). The committee recently cut its benchmark interest rate by 0.25% and lowered the benchmark deposit rate from 3.5% to 3.25%.

This rate cut came only a few weeks after the PBOC injected more than 200 billion Yuan (approximately USD 32.5 billion) via short-term liquidity operations. In addition, it lowered the reserve requirement ratio for banks by 0.5%.

The month of August was busy for the PBOC with many financial policy changes in response to the plunge of the Shanghai Composite Index and a slow recovery in Chinese exports. Beyond helping to cope with the FED’s potential interest rate rise, the PBOC’s moves will open small but important areas for business activity in the financial system.

A lower bound for lending rates and saving rates will give way to a rise in competition among financial institutions, in what will be a marked revitalization of credit. The government’s prior interventions, which resulted in brutal stock market volatility, were apparently aimed at increasing liquidity for the industrial sector in order to boost exports. Now, as far as we know, this new revitalization of credit does not seem to target any specific sector of the economy.

This will trigger a more efficient allocation of resources since the lending rate is too high relative to the savings rate. We must recall that within the Chinese Government’s agenda there has been a consistent push to widen the country’s vigorous domestic market. Much can’t be said about the Communist Party’s intentions, however what is certain is that these new areas of “liberty” opened by recent policy will not be retaken easily by the Party insofar as they improve living standards in China.