China moves towards lending determined by markets forces, rather than government fiat

China will remove its floor on lending rates tomorrow, and markets seem to be interpreting the move by the People's Bank of China as easing. See the reaction in the Australian dollar:

Controls on bill discount rates and a ceiling on lending rates for rural credit co-operatives will also be scrapped, allowing banks more freedom to lend on commercial principles.

Mark Williams, chief Asia economist, Capital Economics:

In principle, the change could lower borrowing costs, in particular by allowing banks to offer better rates to more credit-worthy borrowers. In practice, the immediate difference will be small. The rapid growth of the corporate bond market has provided an alternative source of credit for larger firms in recent years. For those that do borrow from banks, only 11% of loans in the first quarter were priced below the benchmark rate. This implies that competition between banks is unlikely to drive rates significantly lower.

Nonetheless, this is a significant development for China’s financial sector in the direction of having interest rates determined by market forces rather than government fiat.