Interest rate reform rolled out to all of Shanghai

Banks outside city's free-trade zone to decide foreign exchange deposit rates from today

PUBLISHED : Friday, 27 June, 2014, 1:04am
UPDATED : Friday, 27 June, 2014, 1:38am

The mainland's central bank will let all banks based in the city of Shanghai and not just those operating in its free-trade zone to set the rates for foreign exchange deposits from today, in a move highlighting its determination to expand and put in place drastic financial liberalisation reforms.

The People's Bank of China allowed Shanghai banks to set the rates just four months after the pilot scheme was implemented in the 28.78 sq km zone.

Zhang Xin, the head of the PBOC's Shanghai branch, said the first phase of the reform in the zone proved successful and cemented the central bank's belief that it could accelerate the pace of liberalising interest rates.

Australia and New Zealand Banking said the expansion of the reform suggested Beijing might soon start similar experiments in the zone.

"The PBOC's bold extension of the liberalisation to the whole of Shanghai, China's financial centre, indicates China's determination to quicken the [pace of] reform," the bank said.

The decision marks an acceleration from the announcement by PBOC governor Zhou Xiaochuan in March that the government's control on banks' deposit rates would be removed within one or two years.

The move applies to foreign-currency deposits worth no more than US$3 million. Shanghai-based banks can pay corporate clients as much interest as they want.

The policy will apply to individual clients later, the central bank said.

Zhang told local bankers in a government conference yesterday that risk controls would still be given a priority, requiring banking officials to keep deposit rates relatively stable despite the liberalisation.

In Shanghai, foreign-exchange deposits were valued at US$76.7 billion, accounting for one-seventh of the mainland's total.

Beijing approved the mainland's first free-trade zone in Shanghai last September so that a market-based interest mechanism and the yuan's full convertibility would be implemented.

The authorities, however, were taking a go-slow approach towards major financial liberalisations in the zone owing to worries about rampant hot-money flows.

Mainland banks enjoy a high net interest margin thanks to the rates set by the central bank.

The PBOC is under pressure to introduce competition in the banking sector by liberalising the interest rate system. The Shanghai free-trade zone is a testing ground for further economic reforms as the cabinet promises to expand some of the policies tailor-made for the zone to other parts of the mainland.

Last month, the PBOC allowed companies and institutions to set up special accounts in the zone.