China is to scrap bank lending caps in a bid to galvanise the slowing economy with credit, the latest milestone in liberalising the tightly controlled banking sector.

The State Council, China’s cabinet, on Wednesday issued a draft proposal to ditch the country’s long-held loan-to-deposit ratio of 75 per cent. This follows April’s launch of a long-awaited deposit insurance system, a crucial step towards deregulating domestic interest rates and market-based capital allocation.

Scrapping the LDR cap, which could become law next year, would allow banks to act more like their peers elsewhere and seek alternative sources of funding such as the interbank markets. China’s banks have an overall LDR of about 65 per cent while the Australian banking system, for example, has an LDR of 113 per cent, according to ANZ economists.