Shanghai extends liberalization of interest rates

China's central bank is liberalizing interest rates on smaller foreign-currency deposits across Shanghai in the first pilot free trade zone reform to be applied outside the area.

From today, interest rate ceilings on foreign-currency deposits of less than US$3 million will be removed following a 4-month trial in the zone, the People's Bank of China's Shanghai office said yesterday.

It will apply to companies initially but could be extended to individuals later, said office deputy director Zhang Xin.

The city currently has more than US$20 billion in smaller foreign-currency deposits, Zhang said.

Foreign-currency deposits amounted to US$76.7 billion in Shanghai at the end of May, a seventh of the national total. Outstanding foreign-currency lending was US$79.8 billion, a 10th of the national total.

Liu Ligang, chief economist at Australia & New Zealand Banking Group for China, described the move as "an important experiment for China's interest rate liberalization."

"The PBOC's bold extension of the liberalization to the whole of Shanghai, China's financial center, indicates China's determination to quicken the reform," he said. "It also suggests that China may soon start a similar experiment for yuan deposits in the FTZ or banks' free trade accounts."

Seven banks — the Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Bank of Communications, Shanghai Pudong Development Bank, Bank of Shanghai, and China Merchants Bank — have been granted approval to offer free trade accounts, which in theory allow holders to move local and foreign exchange funds in and out of China without being subject to the strict capital controls that apply outside the free trade zone.

Liu said China will likely roll out liberalization on foreign-currency deposits across the whole country if the trial for Shanghai is successful.

Foreign-currency deposits totaled US$566 billion in May, representing about 3 percent of total deposits in China.

The central bank said 15 domestic and foreign banks have recently formed a self-regulatory organization for interest-rate pricing, which aims to prevent significant flows in deposit and interest-rate changes.

It will play an important role in preventing unfair competition among the banks as well as deposit movements between branches at different locations, said Zhang.

The central bank set a ceiling of 3 percent on one-year US dollar deposit rate in May 2005.

Banks on China's mainland are currently offering well below that level.