Just out from the PBOC, google translated [7]:
People's Bank of China decided to further promote market-oriented interest rate reform
Approved by the State Council, People's Bank of China, from July 20, 2013 from the full liberalization of financial institutions lending rate controls.
First, the cancellation of financial institutions lending rate 0.7 times the lower limit, by a financial institution lending on commercial principles independently determine the level of interest rates.
Second, cancel bills discounted interest rate controls, changing the discount rate at the rediscount rate plus points in a manner determined by the financial institution determined independently.
Third, the establishment of rural credit cooperatives are no longer lending rate caps.
Fourth, to continue to strictly implement differentiated housing credit policies to promote the healthy development of the real estate market, individual housing loan interest rate floating range temporarily adjusted.
Full liberalization of lending interest rate controls, the financial institutions in consultation with the customer pricing will be further expanded space, and promoting financial institutions to take differentiated pricing strategy, and reduce financing costs; favor of financial institutions to continuously improve the ability of independent pricing, changing the operating mode , improve service levels, increase business, residents financial support; help to optimize the allocation of financial resources, better play the role of financial support for the real economy, but also strong support for economic restructuring and transformation and upgrading.
Besides optics, because China does not have a market clearing interest rate so this announcement is largely moot, will this announcement have an actual impact on Chinese lending or transmission mechanisms? Hardly, as it simply reinforces the conventional SME lending pathway - ostensibly with the goal of making it easier or "at market" - at the ongoing expense of shadow banks. And since there are trillions in renminbi parked in various shadow bank intermediaries, all of this existing credit, which the PBOC is clearly targeting, will still have to be delevered, an amount which as we first calculated will be at least CNY1 trillion and likely much more.
As for the full implications of the Chinese credit bubble [8], which we described here in April, this doesn't change on bit the pain that is still to come.