Scrapping interest-rate controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth. While officials must be on guard for any excessive competition for deposits that could increase borrowing costs for companies or lead to lenders going bust, weakness in the economy may be mitigating the risks.

Ending the ceiling is an important milestone but comes in the wake of “a tremendous amount of deposit-rate liberalization over the last several years,” especially in the shape of wealth management products, according to Charlene Chu, a partner at Autonomous Research Asia Ltd.

Wealth products issued by Internet firms are increasingly siphoning away deposits, making rate controls less effective and adding urgency to accelerating reform, the central bank said in a question-and-answer statement after the move. History shows that the best time to deregulate rates is when they’re being cut and inflation is easing, it said.

Eoin Treacy's view

The wide disparity between the official lending rate and deposit rate has been a contributing factor to the casino-like manner in which the financial markets function but has also been a major profit centre for the banking sector. 

The  FTSE/Xinhua A600 Banks Index has paused in the region of the 200-day MA but a sustained move to new reaction lows would be required to question medium-term scope for continued higher to lateral ranging. 

Ali-Pay has benefitted enormously from the inability of banks to compete on deposit rates and today’s announcement is not good news for that business model. That portion of the business is not part of the Alibaba listing in the US which rallied today on the potential that lower reserve requirements will contribute to improved consumer spending.