Commercial banks should have more say

Lenders' decision to ignore central bank advice shows an aversion to risk that should be lauded

At a meeting on May 12, Liu Shiyu, vice-governor of the People's Bank of China, urged the chiefs of some major commercial banks to give preference to loans for first-home buyers and charge them reasonable interest rates. But even after three weeks, the tight housing mortgage market has not shown any sign of easing. Instead, some commercial banks have raised their lending rates.

A recent survey conducted by a financial service company in 21 cities across the country shows that more than 40 percent of commercial banks have charged first-home buyers 10 to 20 percent higher interest rates than the benchmark lending rate over the past half month. The rate obviously is higher than that imposed on homebuyers in April.

State-owned but independently run lenders have always followed the central bank's "window guidance", like the one on May 12, even if they are non-binding policy recommendations. The commercial banks' defiance of the central bank's latest guidance and the lack of appropriate response from the PBOC (or central bank), therefore, raise certain questions. Is this a presage of a change in the financial management approach of China's top monetary regulator? Isn't the commercial banks' attitude toward individual housing loan seekers directly related to the chilly changes in the housing market in recent months?

After years of relentless macro regulations, China's high housing prices are finally showing some signs of stabilizing (perhaps even declining), with an increasing number of people believing this could be the turning point in the housing market. If such a sentiment dominates the market, it could possibly prompt people who bought houses using mortgages to stop repaying their loans and shift the risk resulting from declining housing prices to banks. And once this phenomenon spread across the country, it would result in a financial catastrophe for lenders. Hence, as a normal risk-prevention move, commercial banks have adopted a cautious attitude toward the personal housing mortgage business.

Some banks, especially small ones, believe that raising mortgage rates is an effective way of deterring some individual borrowers from seeking loans or completely stopping such business to pre-empt financial risks. Given these conditions, it is not strange that the central bank's "window guidance" has failed to achieve the desired results.

As state-owned lenders that have to perform certain social responsibilities, the commercial banks have indeed harmed the interests of individual homebuyers by not following the central bank's "window guidance". But as commercial lenders, the banks have demonstrated their increased risk-prevention awareness, which needs to be appreciated. By unconditionally obeying the central bank's administrative mandates, commercial banks would have to sacrifice their independent and market-oriented decision-making rights, and possibly sit on huge amounts of bad debt, which have to be compensated by the government with taxpayers' money.

A fully market-oriented lending mechanism has yet to be established for banks, but calls for financial reforms that would allow failed banks to go bankrupt have remained very high. This means commercial banks themselves, rather than other institutions, have to face the consequences of their actions. In this sense, the failure of commercial banks to follow the central bank's "window guidance" should be seen as a positive development toward marketization of the lending business, and so should commercial lenders' refusal to be used as an unconditional policy tool.

The current interest rate marketization in the country is limited to lending rates, and a rigid management regime is still imposed on deposit rates. Such a half-hearted marketization is beneficial for commercial lenders but puts borrowers at a disadvantage. People once forced to accept high borrowing rates imposed by commercial banks but don't have negotiating chips when depositing their money in banks. This arrangement needs to be changed.

In the final analysis, the commercial banks' response (or non-response) to some extent may be an embarrassment for the central bank, but this is a common practice in a fully marketized economy. As the top monetary regulator, the central bank should focus on how to guide commercial banks to prevent financial risks rather than impose conditions on their micro activities.

The author is a Shanghai-based commentator on the economy. The views do not necessarily reflect those of China Daily.

(China Daily Africa Weekly 06/13/2014 page12)