By Xiaoyi Shao and Kevin Yao
BEIJING, March 11 China's central bank governor
said on Tuesday that the country's deposit rates are likely to
liberalised in one to two years - the most explicit timeframe to
date for what would be the final step in freeing up banks to set
their own interest rates.
The move will let financial markets decide the price of
loans, which economists say will go a long way to prevent the
wasteful investment funded by artificially cheap credit that has
led to a massive buildup in debt.
"Deposit rate liberalisation is on our agenda. Personally I
think it's very likely to be realised within one to two years,"
said Zhou Xiaochuan, the head of the People's Bank of China.
Zhou spoke in a media briefing lasting more than an hour at
China's annual parliament session. He offered few surprises,
reiterating a promise to speed-up financial reform and to move
steadily towards freeing up the yuan on the country's capital
Analysts expect the controls on deposit rates to be lifted
gradually. The current ceiling on deposit rates is 110 percent
of the benchmark set by the central bank.
However, Zhou said he expected deposit rates to rise as a
result of liberalisation. The central bank already allows banks
to set their own lending rates, but there is limited room for
them to float lending rates given the controls on deposit rates.
Beijing announced sweeping reforms late last year as it
tries to shift the economy away from a reliance on the
investment and exports that have fuelled double-digit expansion
for three decades in favour of consumption and services, which
it hopes will generate more sustainable long-term growth.
Analysts said Zhou's remarks showed China's reform plans are
on track. "It's in line with expectations," said Ting Lu of Bank
of America-Merrill Lynch in Hong Kong.
The central bank is widely expected to introduce a deposit
insurance scheme before liberalising deposit rates to protect
savers in case a freed-up market leads to major turbulence for
HSBC analysts said they expected the insurance scheme to be
introduced "in the coming months".
Much of China's economic expansion in recent years was
fuelled by a rapid rise in debt levels, stirring concerns that
China is inflating a credit bubble that may destabilise its
economy as growth cools.
A Thomson Reuters analysis of 945 listed medium and large
non-financial firms showed total debt soared by more than 260
percent, from 1.82 trillion yuan ($298.4 billion) to 4.74
trillion yuan ($777.3 billion), between December 2008 and
Standard & Poor's estimated outstanding bank loans and bond
debt among non-financial companies in China reached about $12
trillion at the end of 2013, the equivalent of more than 120
percent of GDP.
On Friday, China recorded its first domestic bond default
when loss-making solar equipment producer Chaori Solar missed an
interest payment, setting a landmark for market discipline in
the world's second-largest economy.
However, Shang Fulin, the head of China's bank regulator,
played down the debt risks.
"China's banks have been growing with high speed in recent
years, which indeed brings some risks. But the risks are
generally under control," Shang said.
"Our provisions and capital for bad assets are sufficient."
SMALLER STATE PRESENCE
China also flagged more competition for the country's banks.
Shang said the government will allow five privately owned
banks to be set up in the wealthier regions of Tianjin,
Shanghai, Zhejiang and Guangdong to support cash-starved small
E-commerce giants Alibaba Group Holding and
Tencent Holdings Ltd are among the companies with
approval to take part in the pilots, the Communist Party's
official newspaper, the People's Daily, reported.
Private investors have long complained about how they are
unable to invest in China's profitable banking sector, which is
overwhelmingly dominated by the state.
Cutting bureaucracy and reducing state presence across a
range of sectors is a central theme in China's reform ambition,
a subject also touched upon by Xiao Gang, the head of China's
Xiao said it is normal to see increased volatility in the
country's capital market, and the regulator will consider
possible market impact when introducing new reforms.
The securities regulator let initial public offerings resume
in January after a 14-month hiatus, but the worrying spectre of
insider trading in the IPO market has prompted regulators to
Neither Zhou nor the other financial chiefs commented about
the state of China's economy.
Data at the weekend raised fresh concerns about the outlook
for the world's second-biggest economy. Exports in February
tumbled more than 18 percent from a year earlier and purchasing
managers' reports have suggested factory sector growth is
Every bout of weaker-than-expected data raises market
speculation that in pushing through with reforms, Beijing is at
the same time sending the economy into a slump.
The government expects the economy to grow 7.5 percent this
year, which would be the lowest pace in 24 years, although
Finance Minister Lou Jiwei said that this target was flexible.
The economy grew 7.7 percent last year.