Chinese premier Li Keqiang to use free-trade zones to cut high bank rates

Li Keqiang warns banks that he will use the country’s FTZs to help bring down borrowing costs and force lenders to change their ways

Premier Li Keqiang has sent a clear message to the mainland’s commercial banks: he will use free-trade zones to ratchet up pressure on the lenders to cut borrowing costs for cash-hungry businesses.

During a tour of the Fujian FTZ on Thursday, the premier said funding costs could be lowered by freeing up cross-border capital flows via the zones, according to the central government’s official website.

The comments came after a corporate executive told him that the cost of a loan from an overseas lender via the Fujian FTZ was just 4 per cent, 1.35 percentage points below the central bank’s benchmark lending rate.

“The original purpose of setting up the free-trade zones was to make the most of opening-up to push ahead with reforms,” Li said. “We hope funding costs on the mainland can be cut by liberalising cross-border fund flows.”

The remarks by the country’s top policymaker highlighted the reluctance of the state-owned banks to give up some of the lofty profits they enjoy through monopoly, high interest margins, despite repeated calls from the top to change.

Beijing launched the Shanghai FTZ in late 2013 and three similar zones in Guangdong, Fujian and Tianjin this week in a bid to bolster trade and invigorate the real economy.

The financial authorities have already rolled out a series of incentives at the Shanghai zone to promote offshore borrowing as part of a broader push to liberalise the yuan’s capital account.

Companies based in the Shanghai zone are allowed to borrow the equivalent of up to double their registered capital from offshore sources without seeking regulatory approval.

Funding costs are much lower offshore because mainland banks are unwilling to extend credit to small businesses, focusing instead on granting loans to big state-owned firms to rake in easy profits.

Sources close to the People’s Bank of China said the experiments with financial liberalisation carried out at the Shanghai FTZ would be expanded to the three new zones because the premier was determined to overhaul the financial system to help companies struggling to secure much-needed funds.

Many of those needy firms access capital through the shadow banking system, including wealth management products, which normally have an interest rate of about 10 per cent.

Liu Ligang, ANZ Bank’s chief economist for Greater China, said Li would need support from lawmakers to create a new and effective financial system.

“His efforts to use FTZs to push financial reform are in a right direction,” Liu said.