December 16, 2013 / 10:21 AM / 4 years ago

China's interest rates will have upside bias when freed - chief

BEIJING, Dec 16 (Reuters) - China’s borrowing costs will have a tendency to rise once controls on interests rates are lifted due to buoyant demand for funds, Central Bank Governor Zhou Xiaochuan said on Monday.

Zhou said in an interview with Caijing magazine that elevated interest rates will be a “unique trait” of China’s economy as rapid development in the world’s second-largest growth engine keeps borrowing costs high.

“The future point of equilibrium for the price of credit will be decided by total supply and total demand,” Zhou was quoted as saying in the financial magazine.

“Relatively speaking, the total demand for credit in China at present is biased towards the large side...Under such a circumstance, the point of equilibrium for the price of credit will be biased upwards.”

Interest rates in China are managed by the government, which tells banks how much to lend and how much to pay savers for their deposits, in part to protect the profits of commercial banks.

But the government says it is determined to eliminate state control over the level of rates to address criticisms that official interference with the cost of funding distorts the economy and encourages an inefficient use of funds.

As such, interest rate liberalisation is among the priorities for China’s government as it tries to remake the economy in its boldest reform effort in 30 years.

Zhou said that while the People’s Bank of China will focus on preserving financial stability during or after a crisis, it will during normal times rely on competition to get financial organisations to improve their services.

China’s latest plans to change its economic strategy also stresses the need for local governments to take responsibility for debts they have incurred, Zhou said, while possibly allowing them to use new channels to raise funds.

He said China would proceed with plans to free its capital account, but would at the same time take precautions to control risks arising from financial liberalisation. (Reporting by Koh Gui Qing; Editing by Jacqueline Wong)

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