China Could End Interest Rate Control in Two Years

China is likely to ease controls on interest rates paid on bank savings within two years and will allow wider use of its tightly controlled currency for trade and investment, the central bank governor said Tuesday.

Zhou Xiaochuan’s comments follow pledges by Chinese leaders to make the country’s slowing economy more productive by giving market forces a “decisive role” in allocating credit and other resources.

Allowing banks to compete for deposits by paying higher rates on savings would put more money in the pockets of Chinese families, helping to achieve official goals of boosting consumer spending and reducing reliance on trade and investment.

“Liberalization of deposit rates, this should be the last step in interest rate marketization,” said Zhou at a news conference. “I personally believe it is very possible to realize this within one to two years.”

Beijing announced its first major reform of interest rates in July, scrapping controls on lending rates. That will allow borrowers with better credit records to negotiate lower rates with banks, reducing costs for healthy businesses and spurring economic growth.

The central banker did not directly answer a question about why Beijing has guided the exchange rate of its yuan lower against in the dollar in recent weeks. But he pointed to the trade balance, which swung to a deficit in February, and said short-term changes in financial markets are normal, while the central bank looks at the longer term.

“We respect market forces,” Zhou said.

via Mainichi

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza