MOST Chinese banks fell in Shanghai on the first trading day followed the central bank's announcement that commercial lenders are free to price lending rates, the latest deregulation move that may further erode lenders' margins.
Prior to the announcement last Friday commercial banks in China can offer a maximum of 30 percent discount to the benchmark lending rates set by the People's Bank of China. The restriction is now removed and the banks can adopt more differentiated pricing in loans.
The PBOC's action is credit negative for Chinese banks because it is another move toward interest rate deregulation that will narrow their net interest margins, rating agency Moody's Investors Service said in a report today.
Moody's acknowledged scrapping the lending rate floor gives strong bargaining power to the borrowers in order to get cheaper funds, which is an important step in China's financial reforms.
However it also said that the move will have the largest effect on the Big Four banks, namely the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (AgBank) and Bank of China (BOC), all of which have relatively large exposures to large state-owned enterprises that could negotiate for lower lending rates.
Share prices of the Big Four were mixed. ICBC lost 0.5 percent to 3.93 yuan (64 US cents). CCB shed 0.2 percent to 4.35 yuan. AgBank was flat at 2.52 yuan, while BOC gained 0.4 percent to 2.65 yuan. The Shanghai Composite Index rose 0.61 percent during trade today.
"The removal of lending rate control is a major step forward in interest rate liberalization, but it has more symbolic meaning and the impact on bank behavior is very limited," Zhu Haibin, JP Morgan China chief economist, said today in a report. "No banks in practice offer discount close to 30 percent from the benchmark lending rate."
According to JP Morgan, only 11.4 percent of bank loans were extended with 10 percent rate discount at the moment.