China may first relax controls on borrowing costs and widen the “range” for deposit rates as part of changes to financial-industry rules, central bank chief Zhou Xiaochuan (周小川) said in an interview with Chinese-language Caijing Magazine.
The government is waiting for a consensus to emerge among officials and for a “suitable” time to act, as adjustments have been complicated by inflation and capital inflows, the People’s Bank of China governor said, according to a transcript of the interview on the magazine’s Web site yesterday. The interview took place “recently,” Caijing said, without giving a date.
Zhou’s comments highlight the central bank’s concerns that overhauling China’s interest-rate system when growth is slowing and inflationary pressure persists would create difficulties for banks to implement changes. The IMF said in November last year that China needs to move to a more market-based way of setting rates to help contain financial risks.
“There’s a question of finding the right time for reforms,” Zhou said.
“Based on our current view, the global financial crisis has yet to calm down and the external environment still warrants observation. Domestically an economic downturn and inflation pressures co-exist,” he added.
The central bank removed the ceiling on lending rates in 2004 and allows borrowing costs to drop as much as 10 percent lower than the benchmark rate. Banks have less flexibility on deposit rates and are banned from offering savings rates that are higher than the benchmark.
Dariusz Kowalczyk, a Hong Kong-based strategist with Credit Agricole CIB, said relaxing controls on lending rates and allowing a wider range for deposit rates may effectively serve as a rate cut without sending a signal that the bank is “dropping the ball of inflation.”
“This would permit policy makers to both make progress in terms of rate policy liberalization and to ease monetary-policy conditions,” Kowalczyk wrote in an e-mail.
Andre Meier, a resident representative for the IMF in Hong Kong, yesterday called on China to move over time to a more market- based financial system in which prices — especially interest rates — play a bigger role than quantitative restrictions.
Given the “obvious interest-rate gap” with other countries, rushing to relax controls on deposit rates may lead to speculative inflows of funds, Zhou told Caijing.
Zhou indicated the central bank would scale back intervention in China’s currency markets. The yuan’s exchange rate has moved toward its “equilibrium level” and as market forces play a greater role, the central bank will “intervene in the market only when there’s extra volatility, with less frequency and more flexibility,” Zhou said.
The central bank doubled the yuan’s daily trading band against the US dollar to 1 percent from April 16, the first widening since 2007.