Shanghai free-trade zone

Ex-central bank official wary of interest-rate deregulation

Former central bank official opposes relaxing rules on yuan bank deposits in Shanghai experiment, fearing speculators could exploit this

PUBLISHED : Sunday, 15 September, 2013, 12:00am
UPDATED : Sunday, 15 September, 2013, 4:06am

A former vice-governor of China's central bank said yesterday Shanghai's free-trade zone should not spearhead liberalisation of the interest rates paid on yuan bank deposits to avoid providing opportunities for speculators to exploit the difference with interest rates outside the zone.

Wu Xiaoling, now a vice-chairwoman of the financial committee of the National People's Congress, is among the first economists to openly oppose deposit rate deregulation in the zone, although it is expected to happen.

"I personally don't advocate liberalising deposit rates in the free-trade zone, because the interest gap between inside and outside the zone could lead to arbitrage," Wu said on the sidelines of a banking forum in Beijing.

"However, I think it appropriate to improve the yuan's convertibility on the capital account [the extent to which foreign currency can enter China and be exchanged at market rates for yuan, and vice versa] and trials allowing foreign capital to invest in mainland securities could be carried out in the zone," she said.

Many economists see interest rate deregulation as a precursor to a freely tradable yuan because proficiency in doing this domestically would prepare banks better for global market fluctuations when the capital account is fully opened according to Zhao Xijun, a finance professor at Renmin University in Beijing.

"However, it's not necessarily that one reform should come earlier than the other," Zhao said. "I think the two reforms could be carried out simultaneously and phased in gradually in the Shanghai free-trade zone."

The zone, approved in late August, is a clear demonstration of the central government's drive for reform. It is widely expected substantial interest rate liberalisation and exchange rate restructuring will take place there.

Wu said deposit rates should only be liberalised if banks' pricing capability is improved, a deposit insurance system is set up and bankruptcy regulations for financial institutions are in place. The insurance system and the bankruptcy regulations could be ready in a year "if policymakers co-ordinate well", she said.

Shen Jianguang, an economist at Mizuho Securities, said that financial reforms in the zone would bring progress on interest-rate liberalisation and convertibility of the yuan on the capital account. Qualified foreign banks would also be allowed to operate.

The central bank freed up lending rates in July, disappointing market participants who had anticipated a more significant change. In June last year, deposit rates were allowed to rise by 10 per cent, an important step towards rate deregulation.