China's interest-rate liberalisation seen to be achieved in 1-2 years

Significantly shorter than expected.

According to Barclays, financial regulators gathered at the site of the National People’s Congress on 11 March 2014, holding a press conference to answer key questions on China’s financial reforms and future development.

Barclays noted that the key surprise from this press conference is the 1-2 year time horizon to finish the deposit rate liberalisation, as mentioned by governor Zhou.

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The faster-than-expected implementation could put further pressure on banks’ funding costs and net interest margins, negatively impacting banks’ profits in the short term. In the long run though, this could remove an overhang on the banking system.

When asked about interest-rate liberalisation, governor Zhou Xiaochuan said that deposit-rate liberalisation is the last step in the interest-rate deregulation journey. In his personal view, 'it' could be achieved within the next 1-2 years; we interpret 'being achieved' as 'fully or largely completed'.

This time-frame is significantly shorter than what we and the market expect. We believe accelerated deposit-rate liberalisation could further intensify competition, putting more pressure on banks’ funding costs and net interest margin, and therefore having more of a short-term negative impact on China banks.

In fact, recent rapid growth of money-market funds and other Internet financing products already accelerate the liberalisation process and add funding costs for banks.

Regarding the impact of such penetration, Governor Zhou believes that the high return from Internet financing products may not be sustainable, and over time such high returns could decline through market-oriented financial resources allocation and competition. Ultimately, the interest-rate level is determined by overall money supply and demand.