Rates will be determined by the China Association of Banks - an industry body formed last year.

Efforts to reform China's foreign currency interest-rate policy have been gathering pace as the country prepares to join the WTO. Last week, the People's Bank of China cut foreign currency interest rates, taking its cue from the United States Federal Reserve. It was the mainland's fifth rate-cut this year.

China took the first step in reforming its foreign currency rate policy September last year, allowing the market to set rates for loans and deposits amounting to more than US$3 million.

The latest interest rate reforms will also allow rural credit co-operatives to widen the band for yuan interest rates in the second half.

The floating band for deposit rates will expand to between 10 per cent and 20 per cent, while that for lending rates will widen to 70 per cent.

An analyst at the Shanghai-based China Foreign Exchange Trade System said the government chose to tackle rural credit co-operatives first because the loosely-controlled fragmented rural financial system had bred more irregularities than urban financial institutions.

Overall 'the reforms will give the central bank a clearer perspective of the market situation', the analyst said.

Rate reforms for urban financial institutions will take place as early as the first half of next year. Banks will be allowed to extend to all enterprises the 30-per cent floating band for loans which before applied to small and medium-size companies. The band will be expanded to 50 per cent a year later and subsequently removed.

In the past 20 years of economic reforms, rate controls have been the backbone upon which state-owned enterprises could borrow heavily, cashing up on low-interest loans.