Ex-central bank official wary of interest-rate deregulation

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."