PBOC rate cuts yield desired outcome

The People's Bank of China (PBOC) announced cuts to benchmark deposit and lending rates late last month, while also allowing commercial banks to offer depositors rates of up to 20 percent above benchmark.

This move gives banks more flexibility to adjust their actual deposit rates. As soon as the decision was announced, several small- and medium-sized banks immediately raised their savings rates to the new ceiling. In comparison, the country's five largest State-owned banks - including Agricultural Bank of China (ABC), Industry and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China and Bank of Communications - were much slower to react.

But as small institutions lured deposits away from larger peers with favorable rates, pressure quickly mounted for the five banks. At present, ABC is reportedly offering ceiling deposit rates in some regions, while CCB is also preparing for a rate increase. As competition intensifies, other banks will likely follow suit.

Such a development is exactly what regulators want to see when it comes to pushing forward interest rate reforms. Only once banks are given more flexibility will we start to see market forces exert more sway over rates.