China could see interest rate reforms: Central bank chief Zhou

Beijing: Conditions are “basically” ripe for China to forge ahead with interest rate liberalisation, but the country still needs to set up a deposit insurance system, central bank chief Zhou Xiaochuan wrote in an article seen on Wednesday.

Reforms of Chinese commercial banks had laid “an important foundation” for interest rate liberalisation, Zhou said in the article published in the latest edition of China Finance magazine, a publication run by the central bank.

“Currently, conditions for market-oriented interest rate liberalisation are basically ripe. The People’s Bank of China will actively push forward (such reforms),” Zhou said.

Beijing controls China’s interest rate market by setting a ceiling on deposit rates and a floor on lending rates. This protects banks from competition and ensures they have a decent interest rate margin, which is around 300 basis points.

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[caption id=“attachment_250933” align=“alignleft” width=“380” caption=“China encourages qualified domestic commercial banks to “go out” in order to participate in global competition, Zhou said.AFP”]  [/caption]

The central bank will quicken the process of establishing a long-awaited deposit insurance as a key component of “financial safety nets” in the country, Zhou said.

Deposit insurance policy is a measure to protect depositors from losses caused by a bank’s inability to pay back deposits when they come due.

The new insurance system is also seen to be laying a foundation for interest rate reforms, as market-oriented interest rates will force banks to lose a built-in interest rate margin and could put depositors at risk.

China’s banking reforms since the 1997/98 Asian financial crisis, including capital injections and restructuring, have slashed bad bank loans and shored up banks’ competitiveness, leading to stock listings of state banks, Zhou said.

But China still needs to deepen reforms of its big commercial banks, including impelling them to improve corporate governance and establish modern corporate structures that will change their business models that rely solely on asset expansions, he said.

China encourages qualified domestic commercial banks to “go out” in order to participate in global competition, Zhou said.

Zhou also reaffirmed the long-standing goals of improving the yuan’s formation mechanism, increasing two-way yuan swings and “steadily” pushing forward full yuan convertibility.

China also needs to set up new financial institutions that serve small businesses and the agricultural sector, he added.

Under a “counter-cyclical” macro-prudential framework to guard against financial risks, the authorities should step up monitoring of bank liquidity and gearing ratio, Zhou said.

The central bank will flexibly adjust bank credit and differentiated reserve requirement ratios on top of its traditional tools such as the standard reserve requirement ratio and interest rates, Zhou added.

Reuters