PBOC may hasten rate liberalization if conditions permit

China will liberalize interest rates in two years, the central bank governor said on Thursday, noting that the bank will push forward the rates reform timeline depending on the economic circumstances at home and abroad.

"I sense the top leadership regard further reform as a pressing concern and will lose no time on this," Zhou Xiaochuan, head of the People's Bank of China (PBC), told a media briefing on the sidelines of the annual high-level talks between China and the US, which concluded Thursday.

Zhou also said that the central bank is prepared to guide interest rates with short-term and mid-term policy tools and has prepared two or three sets of such tools.

"Measures are still needed to maintain the stability of the financial market. And the central bank is considering policy tools. Central banks in some countries have similar tools," he said.

Zhou also noted that the PBC pays more attention to the trends in the economy and inflation and less to the property market.

In March, Zhou told a media briefing during China's annual sessions of the national legislative and consultative bodies that "removing the ceiling on deposit rates is the last and most critical step for interest rate liberalization, after the central bank scrapped the floor on lending rates in July 2013."

Zhou said Thursday that progress has been made in China's interest rates reform and when conditions are ripe, the central bank will free up the country's interest rates.

However, experts said that the interest rate liberalization will not be a smooth passage for banks, especially the -smaller ones.

Ma Weihua, chairman of Hong Kong-based Wing Lung Bank, said at an industry meeting in April in Nanning, capital of South China's Guangxi Zhuang Autonomous Region, that the reform of interest rate liberalization is a challenge for many Chinese private banks.

"From early 1970s to 1985, when the interest rate reform in the US took shape, an average of over 200 US banks defaulted each year," Ma said.

China has been moving gradually in the direction of interest rate liberalization, including a central bank decision in July 2013 to scrap the floor limit for bank lending rates, and a guideline in December for piloting negotiable deposit certificates on the interbank market.

Zhou also said the central bank will increase yuan's flexibility, which gives the currency more room to fluctuate, and reduce interventions in the foreign exchange market.

"Starting from this year, there is a greater range of the two-way fluctuations of the yuan," Liu Xuezhi, a researcher at Bank of Communications in Shanghai, told the Global Times Thursday.

"The lesson from Japan is always a concern for China's policymakers. But so far, the situation is still under control, and since the beginning of this year the yuan has even depreciated against the US dollar without policy intervention," Liu said.

China's Finance Minister Lou Jiwei said on Wednesday that currency interventions are necessary when the economy has yet to fully recover and capital inflows are abnormal.

"The US side has constantly raised the issue about whether intervention is still needed in our foreign exchange policy," Lou said on the sidelines of the annual high-level talks between China and the US.

"We say it's difficult [to abandon the intervention] when the economy has yet to fully recover, and cross-border capital flows are not normal," the minister said.

The Chinese currency, the yuan, saw its value appreciate by more than 12 percent by January this year after the central bank deepened reforms in the yuan's exchange rate formation mechanism in June 2010, data showed.