China revives key economic reform amid transition

SHANGHAI — China's move to allow more competition in its state-dominated banking sector revives a reform shelved for nearly a decade and de es expectations of a policy freeze before leadership change this year.

In what analysts see as a signi cant step for economic reform, the central bank will allow banks more exibility to set interest rates, effectively introducing greater competition and improving allocation of capital.

Just two months ago, Chinese Premier Wen Jiabao

railed against the "monopoly" of big banks, which have reaped healthy pro ts and funnelled cash to state enterprises while shunning more nimble private rms.

In a policy announcement on Friday — made along with

pictured)

(

the rst interest rate cut in over three years — banks can offer a 20 per cent discount on loans against a governmentset benchmark and a 10 per cent premium on deposits.

"The People's Bank of China has resumed its interest rate liberalisation process, stalled since 2004," said Qu Hongbin, co-head of Asian economics research for HSBC in Hong Kong.

"This... also implies that Beijing is getting ready to step up its pace of nancial reforms."

The change means banks can attract borrowers with cheaper loans while drawing deposits by offering higher interest rates. Previously, lending rates only could oat just 10 per cent below the set rate. — AFP Such a reform was not expected to happen ahead of a once-in-a-decade leadership shake-up in the autumn, with expectations the government would avoid change to preserve political and nancial stability.

"We didn't get it until now, when arguably the political background is less certain," Ken Peng, senior economist at BNP Paribas in Beijing, said. — AF[