Amid Criticism, Chinese Banks Defend State-Set Rates BEIJING - Public anger about soaring profits at Chinese banks has strengthened calls to liberalize the country's state-directed interest rate system, making bank executives defend the regulated deposit and lending rates that have helped turn them into some of the world's biggest lenders by market value. Some delegates attending annual parliamentary meetings in Beijing over the past two weeks openly criticized rising bank profits, taking a public stand that is rare for the country's normally docile legislature. High-profile critics include Wu Xiaoling, a former deputy head of the People's Bank of China, the central bank, which has long promised to speed up rate overhauls. She said that banks" profits were "unreasonable" in the current economic climate. Many blame Beijing's interest rate policy, which puts a ceiling on the interest rates banks can pay to attract deposits and sets a floor on lending rates. For lenders, that ensures a stable, healthy interest rate spread - the difference between the lending rates charged and the deposit rates paid - which is currently hovering around 2.7 percent. The Chinese government has for years talked about freeing up rates to let banks compete for customers without restraint, but it has so far failed to act, in part because of fears that the lenders - bailed out to the tune of 4 trillion renminbi, or $630 billion, in the early 2000s - might succumb under the pressure of free competition. The rising tide of criticism, however, has put top Chinese bankers on the defensive. Net profit at the four biggest Chinese banks increased between 28 percent and 45 percent in the first half of 2011 to a total 336 billion renminbi. Yang Kaisheng, the president of Industrial & Commercial Bank of China, said banks did not enjoy any discernible advantage because of the country's regulated rate program. "Chinese banks" net interest margins are actually low, when compared to other markets where rates are liberalized," Mr. Yang said on the sidelines of the parliamentary meeting. "To suggest that Chinese banks depend on a wide interest margin to drive earnings growth doesn't conform with reality," he added. Generally, bank executives worry that free competition would drive up deposit rates and crimp banks" profits by forcing them to pay more interest to woo savers. Xiao Gang, chairman of Bank of China, said any hasty lifting of deposit rates could lead to overly aggressive competition for deposits, which would in turn push up funding costs in the country. "China has been working on interest rate liberalization for the past 20-30 years, and it won't just decide one day that it'll suddenly become a free-for-all," Mr. Xiao said. Chinese bankers point to the United States to bolster their argument. Federal Reserve numbers show that U.S. lenders have a wider net interest margin than their Chinese peers - 3.15 per cent as of the end of 2011. However, analysts note that U.S. banks typically securitize many of their top-quality loans, taking them off their balance sheets by selling them to investors in the secondary market. This leaves higher-yielding, unsecured loans like credit cards and credit facilities on their balance sheets, which artificially increases their net interest margin figures. At the same time, the high proportion of money that Chinese commercial banks must place in low-yielding reserves with the central bank - currently set at 20.5 percent of deposits - leads to an artificial narrowing of their net interest margins, said Patrick Pong, an analyst at Mirae Asset Management in Hong Kong. Any loosening would be especially severe for smaller lenders that cannot compete against the extensive branch networks of China's giant state banks. The smaller lenders would have to rely on paying higher deposit rates to draw customers.