China to Speed up Interest Rates Marketization

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Last updated at: (Beijing Time) Tuesday, December 03, 2002

China to Speed up Interest Rates Marketization

"China's opening-up and reform strivings in the past years, especially during the past 13 years, has substantially strengthened the role of market in allocating the social resources. Therefore, despite some difficulties, I still think a marketized bank interest rate is dawning right ahead," said Wu Xiaoling, deputy governor of China's central bank.

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China might marketize its banks' interest rates very soon.

"China's opening-up and reform strivings in the past years, especially during the past 13 years, has substantially strengthened the role of market in allocating the social resources," Wu Xiaoling, deputy governor of the People's Back of China, was quoted as saying by the leading People's Daily.

"Therefore, despite some difficulties, I still think a marketized bank interest rate is dawning right ahead."

Wu's revelation indicates that China's promise in 2000 to marketize its banking interest rates within three years might be put into effect in the near future.

The ample domestic capital supply is the first advantage for China to loosen the administrative control over the interest rate, according to Wu.

Boasting of a national saving rate of 39.6 percent, Chinese people have accumulated a savings account of 8.4 trillion yuan (US$1 trillion) by September in this year.

The brisk economy in China is also siphoning a continuous inflow of overseas capital into the country.

Experts are estimating an overseas capital inflow of over US$50 billion by the end of this year.

In addition, the thriving foreign trade is piling up a solid foreign exchange reserve for China.

By September this year, China's foreign exchange reserve has shot up to US$258.6 billion, a year-on-year increase of US$46.5 billion.

"What we lack is not money, but the efficiency of using money," Wu said, pointing the existing irrational financial structure as the culprit strangling the vitality of the whole banking sector.

Without a mature capital market and a well-formed insurance sector, China's State-owned banks and sometimes the government at various levels have taken up the role of major capital distributors, which has in return transferred most financial risk to the State-owned banks and the government.

On the other hand, the whole financial industry, for example banks, security market and insurance companies, has lost a definite and reliable benchmark in their businesses due to the absence of a truly market-based banks' interest rate.

While marketizing the interest rates, the People's Bank of China, the central bank, will first allow a wider spectrum within which the interest rate can float, according to Wu.

Then, the central bank will fix an interest rate ceiling and ground for borrowing and lending, which are finally left to the capital supply and demand in the market, although the central bank's benchmark interest rate is also an influential reference, she said.

As a matter of fact, the central bank has already handed some interest rates, for instance those for foreign currencies and the inter-bank lending, over to the market supply and demand.

In October this year, some rural credit cooperatives - a particular type of financial institution mainly serving farmers - in east China's Zhejiang Province had been franchised to increase their saving and lending rates respectively by 30 and 70 percent if necessary.

The interest rate marketization will surely be a challenging process, according to Wu.

A successful marketization depends not only on a strengthened self-restraint of financial institutions, but also on an improved regulatory capacity of the central bank and other authorities concerned and the enterprises' sensitivity to the marketized interest rates, she said.

By PD Online Staff Forest Lee

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