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  • Dec 20, 2014
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PBOC boss says deposit rate liberalisation to take up to two years

PBOC chief Zhou Xiaochuan says move is last step in reform of mainland interest rates

PUBLISHED : Wednesday, 12 March, 2014, 2:18am
UPDATED : Wednesday, 12 March, 2014, 7:20am

People's Bank of China governor Zhou Xiaochuan says the liberalisation of deposit rates will be the last step in the reform of the mainland's interest rate regime and is likely to be achieved over the next one to two years.

Speaking yesterday on the sidelines of the National People's Congress meeting in Beijing, Zhou cautioned that market interest rates might initially spike if deposit rates were fully relaxed, though the situation would improve later.

"Relaxing control over deposit rates is certainly on our agenda," he said. "I personally believe it can be achieved within one or two years."

The timetable given by Zhou was in line with market expectations as interest rate reform was one of the tasks the government outlined in its 12th five-year plan, for the period 2011 to 2015.

Granting banks complete flexibility in determining returns on savings deposits will introduce more competition and greater risk to the banking system.

Big state-owned banks have previously dominated loan pricing and have in past decades reaped huge profits from the gap between lending and deposit rates.

The PBOC has removed curbs on lending rates but still caps returns on deposits at 1.1 times its benchmark rate, which is 3 per cent for one-year deposits.

Opportunities might emerge during the course of interest rate liberalisation that "may bring relatively high returns in a short period of time for market players", Zhou said. That would push interest rates up but they would return to balanced levels thanks to intense competition, he said.

Citigroup economist Shen Minggao said higher interest rates might pose a challenge to Beijing's economic growth target. The government has set this year's gross domestic product growth target at about 7.5 per cent, unchanged from last year's level.

The world's second-largest economy saw its growth ease to 7.7 per cent last year, the slowest in over a decade, as overcapacity and a weak global economic recovery curbed demand.

Smaller companies have faced difficulties borrowing because banks favour large and state-owned borrowers.

"Higher capital costs would definitely hurt economic activity," Shen said.


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The PBOC head also says that yuan's internationalization is a gradual and long process.
It's ultimately dictated by the free choice of the market.
China has as yet a lot of other more important homework to do.
With capital control intact (more or less), China can independently manipulate both her exchange rate and interest rate to her full advantage.
Hong Kong's yuan aficionados should calm down, and Hong Kong' finance business should be further diversified before it's too late.
But the head's remark doesn't prevent China from playing a greater role in Asia's financial market.
China is expected to be one of the biggest capital contributors (now no doubt mostly in US$) of the coming Asian Infrastructure Investment Bank, which, if successfully established, could also act as an informal lender of last resort --- perhaps some implicit and informal swap lines can be established between the participating Asian governments, to be used in case of emergency.
They then don't have to rely on the mercy of the IMF or the Feb.
And China's rich US$ reserve can earn much higher returns this way than buying those US treasuries with next-to-nothing interest.
It doesn't make any sense for China to continue lending money to the US which enables the latter to finance her army to encircle us.


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