CHINA will set up a national interbank money market by January 1, paving the way for the central bank to use monetary tools to influence the economy. Dai Xianglong, head of the People's Bank of China, was quoted by the Shanghai Securities News as saying a national money market would come into operation by the new year. He said open market operations - which refers to the buying and selling of treasury bills by the central bank to affect money supply and the level of economic activity - would start in April. This is the first time a timetable has been set for the two major reforms, which will help the central bank limit widespread illegal lending. Mr Dai said the central bank would promote the use of commercial bills and discount and rediscount activities as an indirect means to control the economy. Administrative means such as loan quotas and guidelines are commonly used now. Analysts said the absence of market-determined interest rates and the slow progress of commercial banking and state enterprise reforms would severely limit the use of monetary tools. 'In theory, the use of market means to exert macro-control over the economy is welcome, but in practice I doubt they will be effective,' said Sheng Mujie, a consultant with Shanghai Society of Finance and Banking. There are 35 official interbank lending centres nationwide linked to the central bank's electronic clearing system, but not to one another. They are controlled by the central bank's provincial branches. Industry sources estimated there were 45 illegal centres to serve financial institutions which had no access to the official centres. Mr Dai stressed that interbank money-market transactions were supposed to be carried out by different legal banking entities, not among the branches. But industry sources said it was not uncommon in the illegal centres to see branches of the same bank lending and borrowing from each other at exorbitant interest rates, sometimes at 30 per cent. State enterprises turned away by state banks resorted to these centres for loans. 'The result is the central bank cannot control the money supply of the country,' one analyst said. While the central bank could limit money supply through the official banking system, its efforts were negated by strong lending in the illegal money market, he said. Mr Sheng said for open market operations to be effective, there had to be an open interest rate structure and the existence of true commercial banks. China's interest rates are set by the central bank under State Council guidance. 'If interest rates are freed, they will definitely go up. That is something the state enterprises cannot shoulder,' Mr Sheng said. The big four banks - the Bank of China, the Industrial and Commercial Bank, the People's Construction Bank of China, and the Agricultural Bank of China - had made little progress in going commercial. Mr Sheng said another hurdle was the limited supply of treasury bills, government debt securities which mature in less than one year. In August, China issued about 12 billion yuan (about HK$11.15 billion) of one-year paperless treasury bills.