Date
26 May 2017
Removing the cap on deposit rates would mark a landmark reform towards allowing market forces to set the cost of credit in China. Photo: Bloomberg
Removing the cap on deposit rates would mark a landmark reform towards allowing market forces to set the cost of credit in China. Photo: Bloomberg

PBoC official expects deposit rates to be freed up soon

The People’s Bank of China is likely to remove the ceiling on bank deposit rates soon, instead of raising the cap again, according to Sheng Songcheng, head of the PBoC statistics department.

The move would mark a landmark reform towards allowing market forces to determine the cost of credit in the world’s second-largest economy, Reuters reported.

“I believe removal of the ceiling on deposit rates is not far off,” China Business News quoted Sheng as saying.

Sheng suggested that the authorities should do away with the cap on bank deposit rates “when time is appropriate”, saying that it would be meaningless to increase the ceiling again.

Some analysts expect the central bank to free up deposit rates when it next cuts interest rates.

When the central bank cut interest rates in May, the third such move since November, it also lifted the ceiling for deposit rates to 1.5 times the benchmark.

Sheng also said cutting interest rates while cutting banks’ reserve requirement will help boost demand for credit and increase money supply, which in turn would help stabilize economic growth over the long term.

Many economists expect the central bank will cut interest rates and banks’ reserve requirements again in coming months to help support the slowing economy.

In May, China rolled out a long-awaited deposit insurance system to protect savers in case a freed-up market leads to major turbulence for smaller banks, a move that is seen as a prerequisite for full interest rate liberation.

Letting the market set the cost of credit will help avoid the wasteful investment funded by artificially cheap credit that has led to a massive buildup in debt, as Beijing seeks to put the economy on a more sustainable growth path, Reuters said.

In July 2013, China scrapped a floor on lending rates, but banks still price their loans based on the benchmark rate set by the central bank.

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CG

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