The scrapping of controls on lending rates is the first major economic reform launched under the government of President Xi Jinping, who took office this year. Xi and other leaders have promised an array of changes but until Friday no details had been released.

China said Friday it is ending controls on bank lending rates in a move toward creating a market-oriented financial system to support economic growth. China’s central bank has removed controls on lending, and will now let financial institutions self-regulate rates which were previously constrained by a 70 percent floor benchmark.

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Reform advocates see an overhaul of China’s interest rate policy as one of the most important changes required to keep its growth strong. Banks currently lend mostly to state industry rather than the entrepreneurs who create China’s new jobs and wealth. Allowing banks to negotiate their own rates with borrowers could channel more credit to private enterprise.

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Free up more capital for big growth-spurring projects

The old rules, which will be scrapped as of Saturday, said banks could lend at no less than 70% of a benchmark interest rate set by the PBOC. According to Alberto Ades, co-head of global economics at Bank of America Merrill Lynch, only 11% of bank loans were charged at below benchmark during the first quarter of this year. This means that a small coterie of borrowers – nearly all of them large state-owned enterprises whose implicit government backing lets them obtain funds more cheaply than private sector firms – will benefit most from this measure. That could free up more capital for big growth-spurring projects, but it’s hardly liberalization, as noted in The Wall Street Journal.

As with the surprising hands-off approach that the central bank took to last month’s worrying spike in short-term interbank lending rates, the major losers, and likely targets, of this interest rate change are the so-called “shadow banking” providers of “wealth management” products. These outfits had sprung up to fill a burgeoning demand for credit that the more tightly controlled official banking sector was unable to fill. Authorities worried that they were fueling speculative real estate bubbles and fomenting a risky buildup in debts.

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China did not scrap an existing ceiling on deposit rates

The People’s Bank of China didn’t make any changes to its authority over deposit rates or mortgage lending.

China has long set a ceiling for bank-deposit rates and a floor for lending rates, which created an artificially high gap between the two, which yielded state banks with extra cash to feed into the fast-growing economy, which has slightly hampered consumption in China, compared with European countries and the U.S.

Lifting the ceiling on deposit rates would help spur domestic consumption as a driver of economic growth, which will decrease reliance on exports and make the Chinese economy more self-sufficient, and less dependent on foreign investment.

China’s big lenders resisted reform as it will likely hit their margins

China’s big lenders, which include Industrial and Commercial Bank of China (SHA:601398) (HKG:1398), China Construction Bank Corporation (HKG:0939) (SHA:601939), Bank of China Limited (SHA:601988) (HKG:3988) and Agricultural Bank of China Ltd (SHA:601288) (HKG:1288), have generally resisted the long-awaited reform as it will likely hit their margins.

But analysts say that the change is necessary for credit to be allocated more effectively in the economy.

The fact that Premier Li Keqiang took the step after just four months in office sends a signal that he and his administration are serious about making reforms aimed at rebalancing the world’s second-largest economy.

“In principle, the change could lower borrowing costs, in particular by allowing banks to offer better rates to more credit-worthy borrowers. In practice, the immediate difference will be small,” Mark Williams, chief Asia economist at Capital Economics in London, said in a client note.

“Nonetheless, this is a significant development for China’s financial sector in the direction of having interest rates determined by market forces rather than government fiat.”