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.
"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," said Mark Williams of Capital Economics in a report.
The scrapping of controls on lending rates is the first major economic reform under the government of President Xi Jinping, who took office earlier this year and faces a slowdown in China's torrid growth. Xi and other leaders have promised an array of changes but until Friday no details had been released.
"This reform is to further develop the basic role of market allocation of resources — an important measure to promote financial support for the development of the real economy," said a central bank statement. The change takes effect Saturday.
The end of controls could allow banks to charge lower rates to more credit-worthy borrowers, lowering costs for healthy businesses and spurring growth. Until now, the lower limit on lending rates was set at 0.7 times the state-set benchmark interest rate.
Private sector borrowers also might be able to get more access to credit by paying more. That could help to reduce their reliance on a vast, unregulated underground credit market.
Regulators allowed that market to flourish over the past decade to support entrepreneurs. But they have tightened controls over the past four years since discovering state banks were putting money into such unsupervised lending and taking on unreported risks.
Friday's move could foreshadow another significant change in the world's No. 2 economy — raising low rates paid to savers. There was no word on when that might happen.
Beijing has long used its banks to subsidize state industry with low-interest loans. Savers who had few alternative places to put their money were paid low rates on deposits that in recent years failed to keep up with inflation, meaning Chinese families lost money by leaving it in the bank.
That has suppressed household spending, which is among the lowest in the world as a percentage of the economy, and held back efforts to shift the basis of China's growth from exports and investment to more self-sustaining domestic consumption.
Chinese families looking for a better return on their savings have shifted money into more speculative investments in stocks and real estate, helping to fuel a boom in prices of both. They also have shifted money into "wealth management products," bundles of credit card and other debt that pay higher returns but that analysts worry might be too risky for household investors.