Competition is the sole mediator that can create coordination and harmony between finance and the real economy. It also prevents enterprises, especially mid-size and small ones, from being marginalized by banks.

On July 20, China's central bank, the People's Bank of China (PBC) declared that financial institutions would henceforth be allowed to set their own lending rates, no longer bound by the lower restriction of 0.7 times the benchmark loan rate. Removal of rate control is undoubtedly a remarkable step towards interest rate floatation. It is also the easiest, and the least sensitive reform to implement, reflecting the PBC's active yet prudent mentality.

Critics believe the measure is an active response to the Chinese government's latest restrictions to cool off the property sector. But many still doubted whether the measure would have any effect on the real economy and wondered how much it would fundamentally ease small businesses' financing difficulties.

A lowered lending rate means less interest to pay for a loan. But who will actually enjoy the favorable policy is the more important question, because in practice, banks' irregular practices are also pressing companies, who sometimes end up purchasing banks' financial products or depositing a certain amount of money to please the bank before getting loans.

In this sense, if banks' lowering the lending rate leads to their raising other thresholds, the central bank's new policy will only worsen companies' living environment.

Considering such possibilities, the central bank's removal of rate restriction may be an exploration in order to pave the road for the full marketization of interest rate.

The solution to companies' financing difficulty lies, on one hand, in the expansion of the financing market, which would allow businesses to finance themselves, instead of depending on bank loans; on the other, the financial sector should open to private capital to revitalize the already stagnant atmosphere.

State-owned banks will inevitably be forced to compete with private financial institutions in providing financial services to real economy, which achieves the goal of interest rate's marketization.

The attention to PBC's new measures should be more on how it will push forward interest rates' marketization, not how much the measures will boost real economy.

In general, the new measure will bring some positive, yet limited effects to real economy. The real hope is that it will lead the formal acknowledgement of private capital, which will in turn bring competition to the entire finance sector.

This article was translated by Chen Boyuan. Its original unabridged version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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