Officials with the Monetary Policy Department of the People’s Bank of China have disclosed that the central bank will lessen controls to allow the market to decide interest rates. They said that foreign currency loan interest will likely be free within the year. And the interest rates of rural credit cooperatives will be allowed more room for fluctuation.

China’s interest market reform aims to establish a loan and deposit interest system of financial institutes to be decided by market demand with the central bank’s interest rate as a baseline and the currency market’s interest rates as a balancing lever.

The officials indicated that foreign currency deposit and loan interest would be freed first to meet the demand of foreign-funded banks for operating all aspects of forex business after China’s WTO accession. Loan interest rates will be decided by financial institutes according to international interest rates, starting some time in the second half of this year.

Another pilot reform will be allowing more room for interest rate flotation by rural credit cooperatives. The deposit interest rate is allowed to fluctuate between a range of 10-20 percent while the loan interest rate can rise dramatically to a ceiling of 70 percent.

However, urban financial institutes’ interest reform is still under review. The central bank is considering allowing financial institutes, in the first half of next year, to give loans with a 30 percent interest rate float to all enterprises, which is something now offered exclusively to small and medium ones. One year later, the maximum interest rate float will be expanded to 50 percent; in 2003, it will be totally free.

But it will take five to ten years to free deposit interest rates, according to these officials. At the beginning, common deposit interest rate will remain under control and flexible interest rate management will be granted to wholesale deposits.

(www.ccgp-fushun.com by Alex 06/04/2001)