Bloomberg News

Fitch’s Chu Says China Liberalizing Rates May Add to Volatility

June 12, 2012

Charlene Chu, head of China financial institutions at Fitch Ratings Ltd., commented on the liberalization of interest rates in China. She made the remarks to reporters at a press conference in Hong Kong today.

On China’s interest rate liberalization:

“If you look back over the last decade, the main source of stability in the Chinese banking sector was the very stable policy environment that was very strict in terms of government- set interest rates and a closed capital account, which led to very stable capital funding.

‘‘So the fact that they are moving on both fronts at the same time, both in terms of capital account opening as well as interest rate liberalization, is a lot of change in a short amount of time.

‘‘We are quite worried that this could add to volatility in the banking sector. The problem is that they do have funding challenges and they need more money to be coming in from offshore.

‘‘If they were to significantly slowdown the pace of liberalization, then they will be increasingly reliant on domestic funding and that could also be difficult for them.

‘‘I think so far they have been fairly modest in terms of the pace.’’

On the domination by China’s larger banks:

‘‘Clearly, there seems to be a shift in the mindset over the past six months about the need to have a more diversified financial system that meets the needs of all corporate borrowers and particularly SMEs rather than having such a few number of very large banks that can dictate the terms of everything.

‘‘That, combined with the recent interest rate moves, to me suggest that there is a lot more open-mindedness about trimming the profitability of these large state banks and, over the longer term, that is definitely going to be negative for them because these guys are having to raise capital every 12 to 18 months because profitability is not keeping up with asset growth.’’

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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