China will stick to the timetable of liberalizing interest rates within two years, People’s Bank of China (PBoC) governor Zhou Xiaochuan said.
As of now, the nation’s interest rate reform has already tackled several key issues, including liberalizing rates in interbank market and bank loan market, Zhou told senior officials during the annual US-China Strategic & Economic Dialogue, yicai.com reported.
“Interest rate controls on bank deposits will be “gradually lifted”, and we’d like to finish in two years. This goal has not changed,” the central bank chief was quoted saying.
China will also introduce the bank deposit insurance system at an “appropriate time”, he added. The bank deposit insurance scheme is widely seen as a precursor to allowing banks to compete on deposit rates.
That progress that state-owned enterprises (SOEs) and local government financing vehicles (LGFVs) make in becoming real market entities “will hold the key for successful interest rate reform,” Zhou said.
Under the existing system, banks prefer to lend money to the SOEs and LGFVs due to underlying government backing for those entities. However, the entities usually have low efficiency and higher default risk, which in turn will undermine the stability of the financial system, the central bank chief said.
In addition, the People’s Bank of China is also attempting to create a new base monetary instrument, the so-called Pledged Supplementary Lending (PSL), in order to better define and guide the medium-term policy interest rate, Zhou said.
PSL will eventually replace funds outstanding for foreign exchange to become the main channel of base money supply.
– Contact us at [email protected]