The People's Bank of China announced Tuesday that China will
free-up interest rates on foreign currency loans and part of the
rates on foreign currency deposits from September 21, a major step
forward in the liberalization of its tight interest rate system.
Financial institutions will, from now on, be able to set their
foreign currency lending rates in line with the international
market, the central bank said in a circular Tuesday.
Presently, loan rates at Chinese banks are permitted to float only
10 per cent above or below a base level set by the central
bank.
Interest rates on foreign currency deposits of US$3 million or more
will also be liberalized.
Rates on deposits of less than that amount will be fixed by the
China Association of Banks, a national-level non-governmental
organization launched in May to promote self-discipline and
co-operation in the domestic banking sector.
A
central bank spokesman said the move was aimed at advancing the
banking sector's interest rate reform process.
Central bank governor Dai Xianglong said in July that China's
interest rate system would be relaxed over the next three years to
allow the market to decide deposit and lending rates.
These changes will give the central bank more power to adjust the
monetary policy through interest rates, as is the practice in
Western countries.
Insiders have said China will first allow the market to set foreign
exchange interest rates, which are sensitive to changes in the
international money market.
This will be followed by the liberalization of the renminbi, which
it is believed will occur in two or three years time, according to
Wang Yuanlong, a senior researcher with the Institute of
International Finance affiliated to the Bank of China.
"The liberalization of foreign currency rates heralds an
accelerated pace of reform of the interest rate system in China,"
said Wang.
The reforms, which aim at allowing market demand and the supply of
currency and goods decide interest rates, was started several years
ago.
Since May 1996, China has cut its interest rates seven times, which
did lead to some expansion of the economy, but the impact was not
as strong as expected.
Bankers, entrepreneurs and experts have complained about the fixed
currency rate as it leads to an unbalanced relationship between
money supply and demand, which does not concord with a
market-oriented economy.
China's banks tended to lend more to big state-owned enterprises
and refuse small and private firms due to concerns about risks.
"It would be unfair for banks to offer loans with the same interest
rates to different enterprises with different levels of risk," said
Wang.
The new rate policy, though only a small part of the reshuffle of
the financial system now under way, has encouraged hopes that
China's currency will, in time, be linked to the international
market.
(China Daily)