China banks vulnerable to interest rate gap change

SHANGHAI, May 10 (Reuters) - Chinese banks' heavy reliance for profits on the comfortable interest rate gap between deposits and loans makes them vulnerable to any rate changes, a state bank executive said on Saturday.

"The loan size in China is about 30 trillion yuan ($4.29 trillion), and if the gap (between lending and borrowing rates) was narrowed by one percentage point, it would have a direct and considerable impact on banks' profitability," Xiang Junbo, the Agricultural Bank of China president, told a forum at Lujiazui, Shanghai's financial center.

China's benchmark one-year deposit rate is 4.14 percent, but the one-year lending rate is 7.47 percent, offering Chinese banks an interest rate spread of 333 basis points.

China has lifted the ceiling on lending rates and the floor for deposit rates, and banks are allowed to lower lending rates by up to 10 percent from the benchmark rates.

"Most of Chinese banks enjoy a deposit-lending rate gap over 300 basis points, which is significantly higher than mature markets," Xiang said.

He said this situation provides an important incentive for Chinese banks to increase lending.

The People's Bank of China has raised its benchmark interest rate eight times since the start of its latest tightening cycle in April 2006.

(Reporting by Zhou Xin; Editing by Ken Wills) ($1=6.987 Yuan)