Move by People's Bank of China Signals Appetite for Reform
But removing the lending rate floor doesn't address China's problems of overinvestment and capital misallocation.
The People's Bank of China, the country's central bank, announced that it would remove the longstanding floor on commercial lending rates. Previously, the PBOC had set both a floor for lending rates and ceiling for deposit rates: a happy arrangement for banks guaranteed a fat net interest margin, but not the best way to price credit.
We're heartened by the announcement to the extent that it signals an appetite for reform and could augur further changes aimed at financial liberalization. Because the deposit rate ceiling was left in place, however, the move does little to address the problems of overinvestment and capital misallocation, which threaten a debt crisis if left unchecked.
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