HONG KONG — As a rookie at the central bank in Beijing during the early days of China’s economic transformation, Joe Zhang considered it a foregone conclusion that the government would soon loosen its grip on interest rates.

It was the mid-1980s, and Chinese policy makers had been keeping a close watch on the United States, which was phasing out the mandatory caps on bank deposit rates that had been in place since the Depression.

In China, Mr. Zhang said, “the discussion in the government was quite serious. It was about liberalizing all interest rates within four to five years.”

“The Path to Interest Rate Liberalization,” the thesis he wrote in 1986 at the People’s Bank of China graduate school, ‘‘did not stand out in any way, because that was an accepted topic,” said Mr. Zhang, who is now an independent corporate adviser based in Hong Kong.

Nearly three decades later, China still struggles with the issue of interest rates. The new prime minister, Li Keqiang, has made liberalizing rates a priority.

On Friday, the central bank scrapped the floor on lending rates, freeing banks to issue loans as cheaply as they wished, a modest development that pointed to the challenges ahead. The full liberalization of rates, if it does take place, would be a partial but significant shift in the growth model that has come to define China’s rise in the last decade.

Analysts said eliminating the floor on lending rates (mortgage loans remain regulated) was a sign that Beijing was moving forward with promised overhauls. But the practical effect on lending would be minimal, given that almost 90 percent of loans in China are made at or above the benchmark rate.

Policy makers stopped short of removing the ceiling on deposit rates, which analysts say would have much broader repercussions for the profitability of the country’s giant banking industry and for the continued access of politically influential state-owned enterprises to low-cost financing.

“Removing lending rate restrictions is an important symbolic move, which signals the government’s intention to move forward with interest rate liberalization,” Wang Tao, an economist at UBS in Hong Kong, wrote in a research note. ‘‘The next and more important step is, of course, the ceiling on deposit rates. The central bank considers the removal of the deposit ceiling as the most critical yet most risky move in interest rate liberalization.”

Because China’s capital account is still largely closed and the cross-border movement of money remains tightly regulated, China’s savers have limited options for managing their personal finances. As a result, household deposits tucked away in banks have doubled during the last five years, and stood at 42.9 trillion renminbi, or about $7 trillion, as of May.

That trove — equal to 83 percent of gross domestic product last year — has been a low-cost source of financing for state-run banks, which they have tapped to issue loans, mainly to state-owned companies. At the current one-year benchmark rates set by Beijing, banks pay ordinary depositors a maximum of 3 percent annual interest on their savings, and — before the announcement Friday — were required to charge borrowers a minimum rate of 6 percent interest on loans. (Banks are allowed to offer a small premium on deposits, and before the floor was scrapped had also been permitted to give a discount on loan rates.)

Analysts said the tensions over interest rate overhauls highlighted a crucial aspect of China’s growth: The increased use of low-cost and abundant credit has bolstered state companies and fueled an unprecedented surge of investment, all made possible only by effectively holding ordinary Chinese savers hostage to low or even negative returns.

Measures to shift that balance in favor of ordinary savers — like doing away with the control of interest rates — are consistent with Mr. Li’s stated goal of getting China to switch from reliance on investment to a more consumer-driven growth model. But accomplishing this would require Mr. Li to take on powerful vested interests at the state-owned companies that dominate huge swaths of China’s economy.

Article source: http://www.nytimes.com/2013/07/22/business/global/liberalizing-interest-rates-remains-a-challenge-for-china.html?partner=rss&emc=rss