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China economy

China’s central bank ‘set to relax’ deposit rate guidelines

Sources suggest reform that would allow interest rates to be liberalised is in the pipeline

PUBLISHED : Friday, 13 April, 2018, 7:52pm
UPDATED : Friday, 13 April, 2018, 11:12pm

China’s central bank will relax its informal guidance on the upper limit of commercial banks’ deposit rates, facilitating the market liberalisation of interest rates, three sources with knowledge of the matter told Reuters on Friday.

Although the People’s Bank of China scrapped the official ceiling for deposit rates in October 2015, the rates are still largely constrained by the regulator’s guidelines and the market interest rate pricing self-regulation mechanism.

Deposit interest rates are set at around 1.5 times the central bank’s benchmark rates in general.

The bank’s newly appointed governor Yi Gang had hinted at the changes at the Boao Forum for Asia, one of the sources said.

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China’s interest rate liberalisation reforms of letting the market set the cost of credit have been seen by economists as a key step towards allocating capital more efficiently and avoiding the wasteful investment that continues to dog the world’s second-biggest economy.

The tight regulatory environment at the moment provides a window to push forward interest rate liberalisation, as banks are now under more pressure to compete for deposits, a senior banking executive said.

When contacted by Reuters, the People’s Bank declined to comment immediately.