Interest rate liberalization speeds up

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Last updated at: (Beijing Time) Thursday, December 04, 2003

Interest rate liberalization speeds up

The nation's central bank said yesterday it plans to accelerate the liberalization of the interest rate regime, which it sees as lagging behind the needs of economic growth.

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The nation's central bank said on Wednesday it plans to accelerate the liberalization of the interest rate regime, which it sees as lagging behind the needs of economic growth.

"Steadily pressing ahead" with market-orientated interest rate reforms is of pivotal importance to the allocation of financial resources, said Zhou Xiaochuan, governor of the People's Bank of China.

"Even a slight loss in the allocation of financial resources will have a significant impact on economic growth," he told a high-profile forum called The China Conference: Making Financial Markets Work.

An interest rate regime that better reflects lending risks will significantly help rural small and medium-sized enterprises (SMEs), which are the main source of jobs to the 10 million people who enter the nation's job market every year, the official said.

Chinese banks and rural credit co-operatives are currently allowed to raise interest rates on loans granted to SMEs by 30 per cent above base rates set by the central bank. But that space is not enough for banks to fully price in lending risks.

"So, for lending rates, it's mainly about giving more room for upward movement," Zhou said.

As for interest rates on deposits, the official indicated an inclination towards allowing more leeway in lowering rates below the central bank base, citing a growing desire by commercial banks to control the size of their liabilities as banking regulators strengthen capital adequacy requirements.

But he also cautioned the risk of financial institutions raising rates to attract deposits when faced with liquidity difficulties, as the 8 per cent minimum capital adequacy requirement is still not being strictly enforced in China.

"We should be cautious with pushing up the upper limit," Zhou said.

The central bank is reconsidering a policy that allows rural credit co-operatives to raise deposit rates to compete with the numerous postal outlets that have taken away a huge chunk of rural savings simply to redeposit at the central bank for a much higher interest, he said.

That need to compete is gone as a recent reform has deprived the postal system of the privilege, and higher deposit rates have not only narrowed the spread for credit co-operatives, but prompted complaints from other financial institutions, the official said.

Another reason the central bank is speeding up the interest rate reform is to give Chinese banks more time to obtain experience in pricing their products according to market conditions before the banking sector is fully opened to foreign competition at the end of 2006, he said.

In a related development, Lou Jiwei, vice-minister of finance, said also at the conference that his ministry is accelerating reforms of the Treasury bond market in an effort to help establish a benchmark yield curve and facilitate the central bank's open market operations.

A revision of existing rules on Treasury bonds is expected to be completed this month, he said.

The ministry is also considering launching more products like forward contracts, ushering in more institutional investors including foreign ones, merging the stock exchange and interbank sections of the market as well as developing more short-term bonds.

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