Beijing prepares rates reform to ease yuan curbs
Central government plan to deregulate interest rates and changes in rules on forex transactions signal fresh push towards full convertibility
Beijing may be preparing a fresh push to deregulate interest rates, giving new impetus to plans to gradually unshackle the tightly controlled yuan.
The government could scrap the floor for lending rates as early as the end of this year, according to Ba Shusong, a researcher at the Development Research Centre, a policy think tank of the State Council, in a move that would allow market forces to play a bigger role in setting interest rates.
Mainland banks are allowed to offer loan rates as low as 0.7 times the benchmark lending rate stipulated by the People's Bank of China.
Analysts say interest rate deregulation is one of the key steps necessary for full capital account liberalisation.
"It is likely that China will remove the lending floor by the end of this year, a step towards interest rate deregulation," said Guo Tianyong, a professor at Central University of Finance and Economics.
"It will also pave the way for capital account liberalisation and ultimately help in the internationalisation of the yuan."
Ba's comments, in a video clip on state-controlled Chinanews. com, have added to the expectations Beijing is preparing for full convertibility by 2015.
Those expectations had been stoked by an unsourced report earlier this week in the 21st Century Business Herald that People's Bank of China had backed a proposal for full convertibility by the end of 2015.
They were further fuelled by an official announcement from the State Administration of Foreign Exchange, declaring it would simplify the rules for foreign-currency transactions for firms operating in the special economic zones.
SAFE said the changes, effective next month, would eliminate paperwork and reduce the frequency of regulatory checks.
The two developments taken together suggest the yuan liberalisation programme could be gathering pace.
Lu Zhengwei, an economist at Industrial Bank in Shanghai, said: "These moves are part of China's accelerated steps towards interest rate and exchange rate deregulation."
However, these measures were only "minor revamps", which were not expected to bring material changes to the financial system, Lu said.
The removal of a lending floor appears aimed at lowering lending costs for small companies but to be effective, the floor would have to be put into practice.
Lu noted the loosening of controls over foreign-exchange transactions come at a time when China is eager to ward off foreign capital inflows betting on yuan appreciation.
"The key to exchange-rate reforms is making the yuan pricing system more flexible to better reflect market dynamics, instead of small mends," he said.
The State Council recently said it would unveil an operational plan this year to make the currency fully convertible.