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Loan Rates 'First Step' in Reform

iconApr 24, 2012 11:28
Source:SMM
As China progressively introduces policies favoring a market-based currency exchange rate, it is also moving to accelerate the liberalization of interest rates, probably starting with lending rates.

BEIJING, Apr. 24 (Xinhuanet) -- As China progressively introduces policies favoring a market-based currency exchange rate, it is also moving to accelerate the liberalization of interest rates, probably starting with lending rates.

In an interview with Caijing magazine, People's Bank of China Governor Zhou Xiaochuan said the government could relax controls on lending rates first.

His remarks were published on the magazine's website on Monday. Caijing said the interview took place "recently".

Zhou said the government could then liberalize deposit rates gradually by encouraging the development of alternative liability products and widening the fluctuation band for deposit rates.

For banks, deposits are among the items counted as liabilities, as they are owed to depositors.

He said officials are trying to reach a consensus on reforms and are awaiting an "appropriate" time to act.

"There's a question of finding the right time for such reforms. Currently, the global financial crisis has yet to ease and the external environment still calls for further observation.

"In addition, domestically, an economic slowdown and inflation pressures co-exist."

Capital inflows, given the "evident" interest-rate gap with other countries, would also put pressure on the reforms, because rushing to liberalize deposit interest rates could lead to more speculative inflows and exacerbate the concerns of some analysts and ministries, he said.

"The existence of negative real interest rates is a result of various factors. It's not our intention."

China's benchmark one-year deposit rate has been unchanged at 3.5 percent since July, in contrast to near-zero interest rates in the United States and a record low of 1 percent set by the European Central Bank in December.

Lenders are not allowed to offer deposit rates above the benchmark rates.

"Interest rate liberalization is already a work in progress, and it cannot be reversed," said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.

He said the core of the reforms will be market-based deposit rates, and Zhou's ideas show that the central bank will reach the goals of liberalization gradually because it faces great pressures.

"But such buffer measures, such as encouraging the development of some high-end wealth management products to yield a higher real interest rate, would work against the interests of low- and middle-income groups," he said.

Chinese policymakers have been thinking about overhauling the interest-rate system for years.

In October 2004, the central bank removed the ceiling on lending rates and allowed rates to fall as much as 10 percent below the benchmark rate.

It also removed the lower limit on deposit rates.

In March, Premier Wen Jiabao pledged to make interest rates more market-based when delivering his annual Government Work Report.

Zhou said well-contained inflation will help promote interest rate reforms, because "when inflation rises, there will be more price regulations, thus hampering the reforms".

Consumer prices rose 3.6 percent in March year-on-year, after falling to a 20-month low of 3.2 percent one month earlier. The officially set ceiling for 2012 is 4 percent.

Zhou also indicated the central bank will further reduce intervention in the currency markets, as the yuan has approached its "equilibrium level" and market forces have started to play a bigger role in its value.

The central bank doubled the yuan's daily floating band against the US dollar to 1 percent as of April 16, the first widening since 2007.

On the same day, it allowed banks to hold short positions in foreign currencies, to give banks more flexibility in trading in foreign exchange and make it easier to price the yuan.

He said when liberalizing interest and currency rates, reforms of related systems are also needed, such as tax policies and conditions that favor more market players and increased competition.

 

market-based currency exchange rate; China

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