China's central bank took a small step toward its long-promised
liberalization of interest rates by partially removing a cap on
foreign-currency deposit rates in Shanghai. The incremental move is
part of a longer-term bid to introduce more competition within
China's banking system.
The People's Bank of China said Thursday it would expand a pilot
program to all of Shanghai involving small-account foreign-currency
deposit rates that was previously confined to Shanghai's free-trade
zone.
The move goes into effect Friday and will apply solely to
accounts holding less than $3 million, the central bank's Shanghai
branch said in a statement. It will initially apply only to
companies but could be extended to individuals later, it added. In
March, the central bank removed the upper limit on foreign-currency
deposit rates offered by banks in the Shanghai free-trade zone.
The central bank said the move is expected to lay a foundation
for an expansion of the pilot program nationwide. The free-trade
zone, launched in China's business capital last September, is
viewed as a testing ground for economic and financial reforms,
although progress has been gradual.
Liu Li-Gang, an economist with ANZ, said the Shanghai-wide
expansion of the pilot program in such a short time indicates that
China is determined to quicken the pace of financial reform.
"It also suggests that China may soon start a similar experiment
for [yuan] deposits in the free-trade zone or banks' free-trade
accounts," he said in a note.
Beijing has long vowed that it plans to free up interest rates
to make its state-dominated banking system more competitive,
although progress has been slow. Last July, the central bank
scrapped interest-rate controls on loans, but it has retained
controls on bank-deposit rates, now capped at 1.1 times the
official benchmark rates.
The interest-rate liberalization on foreign-currency deposits is
a relatively small and less significant step compared with freeing
up limits on yuan deposits, analysts said.
Foreign-currency deposits account for a small share of China's
total deposit base. Outstanding foreign-currency deposits amounted
to $565.8 billion, equivalent to 3% of the total $18.28 trillion in
total deposits as of the end of May.
A banker with a major state-owned bank said in practice, the
regulatory controls on foreign-currency deposit rates are quite
loose, and the cap on small-account foreign-currency deposit rates
applies only to a few currencies.
The central bank said in the statement that foreign-currency
deposit rates stabilized during a trial in Shanghai's free-trade
zone and there were no major deposit moves in or out of zone. But
it added that it would closely monitor the market to prevent
arbitrage after the trial's expansion.
Beijing has been cautious in moving forward on interest-rate
liberalization, a financial reform it promised a decade ago. Before
it can completely relax its grip on interest rates--especially
deposit rates--China needs to secure a deposit-insurance system,
government officials say.
This would be crucial to protect depositors if a bank fails.
While the government is expected to step in to support any bank in
financial trouble, officials want a clearer picture of government
responsibility as the banking sector becomes more competitive.
--Write to Grace Zhu at Grace.Zhu@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires