Lower Bank Loan Rates Forecast as Volatility Ebbs: China Credit
Lenders, now only allowed to set borrowing costs 10 percent lower than the central bank’s 6.56 percent benchmark, will be given a wider range by the end of this year, according to six of 10 economists surveyed over the past two weeks by Bloomberg News. Three said such a move will occur in 2013.
Central bank Governor Zhou Xiaochuan said last month inflation and capital-flow trends are important as policy makers seek a “suitable” time to loosen control of interest rates. The 100-day historical volatility of the 10-year government bond fell to a four-year low of 6.32 percent from as high as 14.46 percent on Dec. 7, according to Chinabond data. That compares with 10.2 percent for benchmark Indian debt.
“A more stable market would facilitate interest-rate liberalization,” said Darius Kowalczyk, a Hong Kong-based strategist with Credit Agricole CIB. The 10-year bond’s lower volatility “reflects the fact that Chinese data has stabilized after weakening” at the end of 2011, he said.
The world’s second-largest economy expanded 8.1 percent in the first three months, the slowest pace in 11 quarters as export growth moderated and regulators restricted property investment. Export growth weakened more than analysts forecast in April to 4.9 percent from a year earlier, while imports gained a less-than-estimated 0.3 percent, based on data today and Bloomberg News surveys. The statistics bureau will probably say tomorrow that consumer-price increases slowed to 3.4 percent in April from a year earlier.
Interest rates in China have diverged from central bank benchmarks in recent months. The three-month Shanghai interbank offered rate slid 17 basis points, or 0.17 percentage point, in April, to 4.71 percent, on speculation the central bank will increase cash supplies to spur lending. It was at 4.63 percent today. AAA one-year corporate bond yields are near an 11-month low at 4.17 percent, spurring a 32 percent jump in debt sales this year to 1.09 trillion yuan.
China’s interest-rate swaps are falling as the central bank adding funds to the financial system by selling reverse repurchase contracts. While the one-year swap rate fell two basis points to 3.24 percent, it is still up 11 basis points this quarter.
The 10-year government bond yield has been little changed at around 3.54 percent for the past three months, reflecting speculation that central-bank support will buoy the economy.
“China may widen the float range for lending rates in June or July, when inflation will likely slip below 3 percent, increasing room for policy easing,” said Mirae’s Yang, who is based in Hong Kong.
China’s one-year deposit rate stands at 3.5 percent. Banks are banned from offering savings rates higher than the benchmark, while lending rates are not subject to any official ceiling and are allowed to float 10 percent below the fixing.
An artificial gap between rates banks pay depositors and the money they charge on borrowers has helped create the world’s most-profitable lenders. Chinese Premier Wen Jiabao has called for breaking a “monopoly” of state-owned banks that make easy profits.
Industrial & Commercial Bank of China Ltd., the world’s most-profitable lender, earned 208 billion yuan ($33 billion) in 2011, up 26 percent from the previous year. Its net interest income rose 19 percent to 362.8 billion yuan, more than triple fee income of 101.6 billion yuan.
Seven of the 10 economists surveyed by Bloomberg said the government’s next action on loosening interest-rate controls will be to allow a wider range of lending costs. The remaining three analysts said the government will allow greater latitude for both loans and deposits.
“Widening the range of lending rates is the more likely and practical way to help cushion against an economic downturn,” said Lu Zhengwei, Shanghai-based chief economist at Industrial Bank Co. Allowing higher deposit rates is riskier because it would spark “vicious” competition among banks for funds, Lu said.
‘Pros and Cons’
Zhou, head of the People’s Bank of China, said the government may decide first to relax controls on lending rates, according to an interview with Caijing magazine published April 23. Changes to the system tend to be easier when inflation is “relatively low,” while rushing to loosen the hold on deposit rates may induce speculative inflows of funds, he said. “The key is how to gauge the pros and cons of the reforms.”
Banks’ objections may weigh on an overhaul of the system, which needs consensus among senior leaders, said Wang Jun, a researcher with the government-backed China Center for International Economic Exchanges in Beijing. “They are direct participants in the reform with their interests closely linked to the process,” he said.
Widening the lending rate range may cause corporate profitability to fluctuate without resulting in lower pricing on loans at a time when funding demand remains “robust,” Wang said. Jonathan Anderson, a former UBS AG economist who worked as an IMF representative in China in the 1990s, said it will be at least five years before China completely removes rate controls.
Price swings are also limited in the foreign-exchange market. The yuan slipped 0.04 percent to 6.3120 per dollar in Shanghai and has held around the 6.3 level all year, according to the China Foreign Exchange Trading System.
Five-year contracts insuring Chinese government debt against default were at 122 basis points yesterday, down from 147 at the start of the year, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
“The timing is appropriate” to loosen interest-rate controls, though the process may be gradual, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, who formerly worked at the Bank for International Settlements. At the same time, China is unlikely to make “major changes” this year, Zhu said, citing economic uncertainties at home and abroad as well as a leadership reshuffle.
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