May 23, 2013 / 3:00 AM / in 5 years

China may scrap floor for interest rates this year -media

BEIJING, May 23 (Reuters) - China may remove its floor for interest rates as early as this year or next year at the latest, Chinese media said on Thursday, an important step towards freeing the country’s tightly-controlled interest rates market.

Ba Shusong, a researcher at the Development Research Center, a think-tank whose recommendations to China’s cabinet are sometimes adopted, was quoted by local media as saying that interest rate reforms are imminent.

“This is going to happen immediately,” Ba was shown as saying in an online video clip on state media, in reference to interest rate reforms.

“If it’s early, it will happen in the second-half of this year. If it’s late, it will happen next year,” Ba said.

To protect the profits of its state banks, China sets a minimum limit on interest rates and a maximum limit on deposit rates, ensuring that banks get a guaranteed margin of at least 90 basis points.

Banks at present can offer deposit rates as high as 110 percent of benchmark rates and lending rates as low as 70 percent of benchmark levels.

One-year benchmark deposit rates stand at 3 percent while lending rates are 6 percent.

Critics of China’s interest rate controls say they distort the price of credit and encourage wasteful investment. Capping deposit rates also suppresses the returns on bank deposits, spurring savers to plough their cash into other investments including a frothy real estate market.

Advocates of China’s interest rate reforms also argue that it must precede the country’s much-anticipated currency reforms as a competitive rates market could lower lending rates and dampen hot money inflows when Beijing eases control over the yuan.

A central bank official said earlier this month at a meeting in Beijing that the liberalisation of savings rates requires more caution than that for lending rates, as the former could hit small banks especially hard.

Chinese lending and savings rates are already being liberalised at the margins through explosive growth in alternative financing channels such as sales of bonds and trust products.

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