Interest Rate Liberalization in the Pipeline

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Last updated at: (Beijing Time) Monday, March 03, 2003

Interest Rate Liberalization in the Pipeline

The central bank is poised to accelerate its pace of freeing up interest rates to demolish a major obstacle hindering the formation of a competitive environment for the banking industry.

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The central bank is poised to accelerate its pace of freeing up interest rates to demolish a major obstacle hindering the formation of a competitive environment for the banking industry.

The People's Bank of China, the central bank, has made the advancement of liberalized interest rates its priority for 2003.

Having interest rates decided by the market was put forward in the early 1990s as a goal for China's financial reform. The authorities have gradually given banks more freedom to float lending rates in line with borrowers' credit ratings. Rates for foreign-currency lending have been completely freed.

However, in renminbi business, banks still operate according to deposit and borrowing rates set by the central bank or do business within a narrow floating range for major borrowers. This means very limited room for competition in some key services.

The ultimate aim of the banking sector's reforms, which are far from being finished, is to increase efficiency through competition among the banks and enable them to compete with foreign rivals as the country opens the sector wider under commitments made to the World Trade Organization.

However, "without a liberalized interest rate, many reforms (in the banking sector) cannot be pushed forward," Tang Min, chief economist at the Asian Development Bank's Beijing office, said last week.

Newly appointed central bank chief Zhou Xiaochuan, in his first major plan of work as governor, put the issue high on the bank's agenda.

Experiments have been going on in rural co-operatives on a wider band for lending-rate flotation. The experimental band will be widened even further and more places will be included in the scheme, banking sources said.

The central bank might also let banks float deposit rates by introducing negotiable deposit certificates, the sources said.

A key figure in monetary policy-making last week revealed another important detail of the central bank's plan.

"For the next step, the ceiling on lending rates will be abolished, while the bottom has yet to be determined," Yi Gang, secretary-general of the central bank's monetary policy committee, told the China Business Times newspaper.

Yi said the process of interest-rate liberalization has been progressing according to the following roadmap: The rates for foreign currencies would be freed first and then those for the yuan; loan rates would be followed by deposit rates; long-term and large-volume lending and deposits would have their rates freed before rates for smaller and shorter-term ones.

But a timetable is not necessary, he said.

Some experts said the interest rate liberalization could be completed within two years, the China Securities Journal said in a commentary last week.

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