China unlikely to ease controls on interest rates soon

Concrete reforms needed before the central bank can further relax controls, say sources

PUBLISHED : Friday, 21 September, 2012, 12:00am
UPDATED : Friday, 21 September, 2012, 2:46am

Beijing took a small step towards liberalising its interest-rate regime in June, but the central bank is quietly signalling that further concrete steps will not be taken any time soon.

According to people familiar with the thinking at the People's Bank of China, certain structural and institutional reforms must be put in place before lending and deposit interest rates, currently strictly set by the central bank, can be relaxed. And that could be several years away.

Among the pre-conditions is the creation of a national deposit insurance system to protect depositors.

Earlier this month, the central bank invited a select group of bankers and analysts to a closed-door seminar in Beijing, where they discussed the outlook for the mainland's economy as well as the next phase of financial reforms, said the people, who asked not to be named because of the sensitive nature of the matter.

Also earlier this month, the PBOC unveiled a vague blueprint for overhauling the financial sector by 2015, a sign it is determined to proceed.

However, at the closed-door meeting, several senior central bank officials struck a cautious tone regarding the timing of making interest rates more flexible and told the participants that the central bank did not yet have a specific strategy mapped to further liberalise the interest-rate regime, the people said.

Officials, including Premier Wen Jiabao, have called for the breaking up of the monopoly held mostly by the Big Four state-owned banks. Before major financial reforms can take place, the central bank wants to open the banking sector to more players, mostly private ones.

In March, the State Council approved a milestone plan to legalise the underground banking sector in Wenzhou, the city known as the engine of the country's private economy, as a way of allowing the establishment of banks and credit companies backed by private capital.

While these new private banks are getting established - first in Wenzhou as a proving ground and later to be launched nationwide - the central bank does not want to free up interest rates too fast and have those banks aggressively - or recklessly - competing for business by paying too much for deposits and charging too little for loans.

Moreover, the central bank already is worried about a surge of bad debt in the banking system. More new banks could fuel the risk of more bad loans.

Unpublished central bank data shows the non-performing loan ratio for some banks in Wenzhou has rebounded to about 3 per cent. That compared with the national average of less than 1 per cent, said the people.

All things considered, "the PBOC officials believe it's still too early to abandon the current way that the central bank decides on the benchmark lending and deposit rates", said one of the people. "There is no way for the PBOC to announce a new policy rate system anytime soon."