By Xiaoyi Shao and Kevin Yao
BEIJING, March 11 (Reuters) - 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 account.
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 smaller banks.
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 September 2013.
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."
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 firms.
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 securities regulator.
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 tighten controls.
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 stalling.
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.