Tags: China Raises Loan Rates for Banks in Tightening Move

China Raises Loan Rates for Commercial Banks in Tightening Move

Wednesday, 29 Dec 2010 07:40 AM

China's central bank has raised interest rates on loans that it makes to commercial banks, a move that dovetails with benchmark interest rate increases and will have only a limited impact on financial conditions.

The People's Bank of China raised the rediscount rate to 2.25 percent from 1.8 percent, the first such change in two years. It also lifted the one-year relending rate by 52 basis points to 3.85 percent.

The central bank made the announcement on its website (www.pbc.gov.cn).

Commercial lenders rarely tap the central bank for funding because liquidity is so flush in China, making the relending and rediscount rates mostly symbolic in importance.

"It shows the central bank's clear intention of tightening," said Zheng Liansheng, an analyst with China Securities.

The rate rises took effect on Dec. 26 — the same day as the central bank's latest increase of benchmark lending and deposit rates went into force.

"The impact of the relending and rediscount rates is not very big. I don't think there is any special significance to this. The normalization of monetary policy also requires returning these rates to a normalized stance," said a trader at a Chinese bank in Beijing.

Still, some analysts believe the move to push up banks' funding costs could make bonds more attractive for lenders, reducing their incentives to make more loans.

"This move by the central bank aims to increase the borrowing cost of banks. In addition, this could also push up bond yields, which would encourage banks to buy bonds instead of extending more loans," said a trader in Shenzhen.

The central bank has been working to steer money supply and credit growth back to normal to curb inflation, which is running at its fastest in 28 months.

The central bank has raised interest rates twice and increased banks' reserve requirements six times this year.

In addition to rediscount and relending rates, the central bank also sporadically adjusts interest rates on banks' required reserves, which has been kept at 1.62 percent since late 2008, and interest rates on banks' excess reserves.

© 2015 Thomson/Reuters. All rights reserved.

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