PBOC takes another step in interest rate easing

China's central bank is to remove interest rate ceilings on smaller foreign-currency deposits in the Shanghai free trade zone from Saturday, the latest in a number of long-anticipated financial reforms.

Banks in the city will be free to set interest rates for foreign currency deposits under US$3 million in the zone, the Shanghai headquarters of the People's Bank of China said in a statement.

The rule applies to bank accounts opened by companies and organizations registered in the free trade zone and individuals working there for longer than a year, the statement said.

The move marks the full liberalization of interest rates on foreign-currency deposits in the zone and could be promoted nationwide after a trial period, officials said.

In 2000, the central bank allowed banks to set their own lending rates for foreign exchanges and negotiate rates with clients for deposits over US$3 million.

The reform will help to test the market and to gain experience, laying a firm foundation for the deepening of interest-rate liberalization nationwide, said Zhang Xin, deputy director of the central bank's Shanghai headquarters.

The zone has about US$1.2 billion in foreign currency deposits of less than US$3 million, about a quarter of the zone's total foreign currency deposits, Zhang said.

The central bank implemented the current caps in 2005 on four foreign currencies in a number of categories, from demand deposits to one-year fixed deposits.

The one-year rates were 3 percent for US dollars, 1.25 percent for euros, 0.01 percent for Japanese yen, and 2.625 percent for Hong Kong dollars.

Foreign banks generally offer higher interest rates than domestic ones to attract deposits, but the rates were all below the ceiling at a time when major economies around the world applied low interest rates.

The latest move is expected to have only a limited impact on the market as regulatory controls on foreign currency deposits are already relatively light in China, and the rules did not touch on interest rates for the yuan, which lies at the core of interest rate reform, said Lian Ping, chief economist at the Bank of Communications.

The interest rate ceiling for yuan deposits is now set at 1.1 times the central bank's policy rate. For benchmark one-year yuan deposits, the ceiling is now 3.3 percent.

Liberating interest rates is seen as an essential step in China's efforts to rebalance its economy by allowing financial institutions to allocate resources more effectively.

"The interest rate liberalization in the zone is being pushed forward in a gradual manner, rather than being achieved in one go," said Zhu Jianfang, chief economist of CITIC Securities.

The central bank's Shanghai headquarters stressed risk management measures by ordering banks to clearly identify companies when opening accounts, set deposit rates at rational levels, and report abnormalities.

It is the third document the central bank's Shanghai headquarters has released since last week setting out details of financial opening-up measures in the zone.

The central bank has clarified rules for companies in the zone to borrow yuan from offshore, and third-party payment companies were last week allowed to settle payment in yuan for deals between foreign e-commerce websites and domestic companies and individuals.