Bloomberg News

PBOC Says Conditions for Interest-Rate Reform ‘Basically Ready’

January 12, 2012

Jan. 12 (Bloomberg) -- Conditions in China for interest- rate reform to make the cost of money more market-based are “basically ready,” the People’s Bank of China said today.

Reform will proceed after “taking full consideration of the domestic and overseas economic and financial situations,” the central bank said in a one-paragraph note appended to the republication of comments Governor Zhou Xiaochuan made at a conference the end of 2010 and first posted on the PBOC’s website in January last year.

The government announced its intention to establish a market-oriented interest-rate system in 1993 and in 2003 pledged to “steadily push ahead with interest-rate reform.” Steps have included the removal of a ceiling on lending rates in 2004 and allowing borrowing costs to vary up to a range of 10 percent lower than the benchmark rate. China needs to change the way interest rates are set and allow the yuan to trade more freely to help contain risks in its financial system, the International Monetary Fund said in a report in November.

In a Jan. 8 interview with the official Xinhua News Agency, Zhou said that while “there are no major obstacles in thinking” to proceed with interest-rate reform, the current timing “isn’t very good.” The “overly large” gap between interest rates in China and some developed nations where the rate is zero, may “exert very big pressure on capital flows,” he said.

He made similar comments in an interview with the Caixin Century Weekly magazine published on Jan. 2.

Informal-Lending Boom

China’s benchmark one-year deposit rate is 3.5 percent and the one-year lending rate is 6.56 percent. The U.S. Federal Reserve’s benchmark interest rate is close to zero while the European Central Bank’s rate is 1 percent.

State control over interest rates in China has led to a boom in informal lending and a surge in wealth management and trust products that offer returns that are higher than bank deposit rates. Deposit rates, while not subject to a floor, are capped by the central bank. The benchmark one-year deposit rate has lagged behind consumer-price inflation for 23 months.

Zhou’s article republished today listed conditions that would be needed to liberalize interest rates including a “fully fair market competition environment,” “a market-based pricing system for financial products and services” and “further improvement in the transmission mechanism of monetary policy.”

--Victoria Ruan, Li Yanping. Editors: Nerys Avery, Cherian Thomas

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net


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