China's banks will play a larger role in setting their own interest rates, top bankers said yesterday on the sidelines of the 18th party congress.
The move is likely to intensify competition and, possibly squeeze bank profit margins.
Liu Shiyu, vice-governor of the People's Bank of China, said banks would be granted "bigger freedom" in deciding interest rates in the next few years.
Banks can give borrowers a discount of up to 20 per cent on the benchmark lending rate and depositors up to 10 per cent more than the benchmark deposit rate.
Li Lihui, president of Bank of China, the mainland's fourth-largest lender by assets, also said yesterday that the reform would gain speed in the years to 2015.
This is the first time top bankers have openly expressed optimism over rate liberalisation after years of stagnation amid opposition from banks concerned about losing the easy profits generated by interest rate spreads.
"The trend of interest rate liberalisation is irreversible," said Liao Qiang, an analyst at ratings agency Standard & Poor's.
Policymakers made their intention clear after Beijing allowed deposit rates to float in June, surprising most market watchers at the time, Liao said.
However, he does not expect radical reforms as policymakers would still have to look after the interests of banks. The largest banks are mainly state-owned and the banking sector has accounted for over 5 per cent of the mainland's economy since 2009.
The 16 listed banks made a combined 815.5 billion yuan (HK$1 trillion) of net profits in the first three quarters of this year.
Premier Wen Jiabao said in April that the top leadership had "unified thoughts" on breaking the monopoly of the banking sector and that banks were making money too easily.
The current one-year benchmark lending rate is 6 per cent and the deposit rate is 3 per cent, leaving a spread of 3 percentage points for banks.
In a keynote address, President Hu Jintao said China would "steadily" pave the way for interest-rate and exchange-rate reforms, gradually making the yuan convertible under capital accounts.
Liu also said yesterday that exchange-rate reform would pick up in the coming years.