Opinion | China’s slowing economy gives its central bank chief the chance to make his mark on monetary policy history

As pressure grows on China’s leaders to increase funding for small and medium-sized enterprises, it’s the right time for the People’s Bank of China to scrap its benchmark rates and let market-based interest rates be the new anchor

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Yi Gang, governor of the People’s Bank of China, takes questions from the media on the sidelines of the National People’s Congress in Beijing on March 10. Photo: Simon Song

Published: 3:00pm, 2 Apr 2019Updated: 10:27pm, 2 Apr 2019

Discussions about China’s interest rate liberalisation have been warming up since Yi Gang took over as governor of the People’s Bank of China (PBOC). This is not surprising given that Yi is a distinguished scholar, with central banking experience and expertise in monetary economics. Also, like his predecessor Zhou Xiaochuan, known as “Mr Renminbi” for leading the push for a global yuan, Yi is probably keen to make his mark on China’s monetary policy history.

However, the ongoing market discussion of interest rate liberalisation seems to indicate that China has not liberalised its interest rate regime at all. This is incorrect. Sun Guofeng, head of the PBOC’s monetary policy division, shed some light on the current interest rate regime earlier this year, which also point to the steps the central bank might take in the future.

Sun said that while the upper and lower limits of deposit and loan interest rates have been liberalised, the central bank still publishes the benchmark rate for deposits and loans. The country has a two-track system, as both the central bank’s benchmark rates and market-based rates exist and influence the market.

This is an obstacle to market-oriented interest-rate regulation and transmission, Sun said. The central bank plans to further promote market-based rate reforms and integrate the two tracks.

A Chinese flag flutters in front of the People’s Bank of China in Beijing. China has a two-track system for interest rates with both the central bank’s and market-based rates influencing the financial system. Photo: AP

Hence, the key question is: should China scrap the current benchmark interest rates – one-year deposit and lending rates – soon?