China banks to face more pressure(2)

Bank of Communications estimates that its lending profits will be reduced by around 5 to 10 basis points following the decision. And overall, less than 2 percent of China's banking profits growth are estimated to be cut.

"Economists say China's decision last week to partly liberalize its bank lending rates marks a great leap forward, as it shows the central bank's determination to go ahead with its interest rate reform. But they warned that the timing for a complete interest rate liberalization is not yet ripe."

"China's deposit supply is pretty tight right now. So discarding the deposit ceiling will lead to huge competition and stress among Chinese banks. If banks scramble to get deposits, then the higher costs will in the end be transferred to borrowers, which is bad for China's economic growth." Lian Ping said.

"After the interest rate liberalization, commercial banks cannot live only on interest margins. They must develop intermediary businesses, which account for less than 20% of China's banking sector. So I don't think banks are fully prepared for a complete market-based interest rate. And we still need enough time to finish the interest rate reform." Yang Zaiping, Exec. Vice President of China Bank Association said.

Experts also say that China will still need many complementary steps to roll out its complete interest rate liberalization. This includes a mature deposit insurance system, a market-oriented interest rate macro-control mechanism, and a well-developed bonds market. And that seems to be a "mission impossible" for 2013.