In the end, it was the reform that wasn’t. Last weekend, China’s central bank abolished the lower limit on interest rates that banks can charge borrowers. It was meant to be a step along the road from centrally commanded to market-driven rates. But the step is so small – and so irrelevant to what is going on in the market – that it is expected to have no impact whatsoever. The very best that can be said about the reform is that it kept the idea of reform alive.
There had been hopes that the People’s Bank of China (PBoC) would do something bolder, and lift the caps on interest rates that banks are allowed to pay on deposits. This would be the most important change – but it would also be the most difficult and disruptive.
The problem in China is that a desire for better returns among savers and competition for their money means that most banks are already paying as much deposit interest as they are allowed. At the same time, the restrictions on the supply of loans from banks means there is no competitive pressure on the lower limit for lending rates.