SHARES of most Chinese banks fell in Shanghai on the first trading day after the central bank ended controls on lending rates, amid investor concern that the latest deregulation measure could erode lenders' margins.

Prior to the announcement late last Friday, commercial banks in China could offer a maximum of 30 percent discount on the benchmark lending rates set by the People's Bank of China. The restriction has now been removed and the banks are free to adopt more differentiated pricing for loans.

The PBOC's action is credit negative for Chinese banks because it is another move towards interest rate deregulation that will narrow their net interest margins, Moody's Investors Service said in a report yesterday.

The American ratings agency acknowledged that the scrapping of the lending rate floor provides a strong bargaining chip for borrowers 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 impact on the Big Four banks, namely Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China (AgBank) and Bank of China, all of which have relatively large exposures to big state-owned enterprises that could negotiate lower lending rates.

Shares of the Big Four were mixed yesterday. ICBC lost 0.5 percent to 3.93 yuan (US 64 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 to close at 2,004.76.

"The removal of lending rate controls is a major step forward in interest rate liberalization, but it has a more symbolic meaning and the impact on bank behavior will be very limited," Zhu Haibin, JP Morgan China chief economist, said in a report yesterday. "No bank in practice offers discounts close to 30 percent from the benchmark lending rate."

According to JP Morgan, only 11.4 percent of bank loans extended so far have a 10 percent discount rate.

The Singapore-based United Overseas Bank said in a research note yesterday that the PBOC's move should lower financing costs for businesses and support China's long-term economic restructuring, but the impact in the near term is likely to be limited - especially amid the current tight liquidity in the interbank market - as 64 percent of loans in the first quarter were priced above the benchmark rate.