Floor on lending rates axed by PBOC

But Hu said that given the fact that only a very small proportion of bank loans are priced at 70 percent of benchmark rates, it is hard to say if the new move will result in lower loan prices.

Li Xunlei, chief economist at Shanghai-based Guotai Junan Securities, said 90 percent of bank loans in the first quarter were priced higher than the benchmark rates, and as long as the limits on deposit rates are not touched, it cannot count as a breakthrough in rate liberalization.

Huang Yiping, chief economist, emerging Asia, investment banking division of Barclays Bank, said, "Although the key to interest rate reform still lies in loosening the upper limit on deposit rates, the removal of the lending rate floor might gradually lead to lower financing costs."

Liu Ligang, chief China economist at ANZ Group, said: "China's State-owned enterprises will definitely benefit from the removal of the lending rate floor, as they will have greater bargaining power over banks. The government bond yields will provide a floor for the lending rates."

He said the move could be viewed as a stimulus to the real economy, as State companies will face a lower effective borrowing rate. It would also help the economy pick up somewhat late in the third quarter and in the fourth quarter. "Therefore, a 7.5 percent growth target is more likely to be achieved this year."

The central bank said in a separate statement it has not touched the ceiling on deposit rates because it is the riskiest part of the reform and must be promoted step-by-step.

Cao Yuanzheng, chief economist at the Bank of China, said, "The liquidity crunch in the interbank market in June has shown that banks haven't equipped themselves with mature liquidity management. They are not ready for more substantial deregulation on interest rates."

It is very unlikely that the PBOC will remove the deposit ceiling this year. Instead, some gradual loosening might be introduced, such as allowing banks to develop negotiable certificates of deposit, Hu said.

Sheng Songcheng, head of the central bank's statistics department, said earlier that to free up interest rates, China could raise or even remove the upper limits on banks' deposit rates.

"It could further expand or even remove the officially set floating range of medium- and long-term deposits and then gradually expand the upper limit on short-term and small-sum deposits, until caps on such deposits are abolished."

Analysts have warned that interest-rate liberalization will pose a greater risk to smaller lenders, as they would tend to raise deposit rates in the competition for funds, and prefer to extend riskier loans for higher profits.

Central bank Governor Zhou Xiaochuan said in November that further rate liberalization will come from certain financial institutions. This will be achieved by loosening price restrictions on alternative financial products.