China banks unprepared for interest rate liberalization

Bank profits fading as interest rate reform begins

About 52 percent of surveyed bankers said that interest rate liberalization should take place in the period from 2015 to 2017, while only 2.8 percent of the bankers agreed that 2012 is the right time, the report showed.

The result indicates most of the bankers were not prepared when the central bank made the first move toward a more market-driven rate by doing away with a universal fixed deposit benchmark interest rate. The central bank lowered the benchmark on June 7, and allowed rates to fluctuate up to 10 percent above the benchmark for commercial banks.

Real banking reform would impact the economy broadly, the copper "carry trade" would be put out of business, all the way up to the savers' subsidizing of state and well-connected industry. Whether banks will shift to providing funding to SMEs as hoped isn't clear. Default rates are high and it seems unlikely banks will allow rolling of principal and back interest into a new loan as they do for project funding.

At the same time Japan's new PM Abe has made noise about raising the target inflation rate there. What's moving Japanese markets?

In my opinion, a higher inflation target by the Bank of Japan is not particularly interesting. After all, the Bank of Japan can't hit the current "goal" of 1 percent inflation. I don't have much faith that renaming the "goal" a "target" and increasing it to 2 percent will be like waving a magic wand. But something much more significant is afoot - the possibility of explicit cooperation, albeit perhaps forced cooperation, between fiscal and monetary authorities. The loss of the Bank of Japan's independence to force the direct monetization of deficit spending is the real story.