China to free up interest rates within two years

Central bank to take reality check on realty

BEIJING -- China's central bank governor Zhou Xiaochuan reiterated on Thursday that China is likely to have fully liberalized interest rates within two years, but the timetable will depend on economic circumstances at home and abroad.

"The timetable to liberalize interest rates will be mostly carried out according to conditions of the domestic economy and global economy, but we believe it could be realized within two years," Zhou told a press conference at the ongoing China-US Strategic and Economic Dialogue.

In March, Zhou said at China's annual legislative session that the country is very likely to ease its grip on banks' deposit rate, the last and most important step of interest rate liberalization, in the coming one or two years.

At Thursday's press conference, Zhou said the Chinese leadership has stressed "a sense of urgency in reform" and the People's Bank of China is preparing accordingly.

After the interest rate is freed up, the central bank will have its policy rate play a guiding role in the market via mechanisms on the monetary market, said Zhou, adding that the bank is preparing two or three sets of such tools.

China has taken incremental steps toward interest rate liberalization, including a central bank decision last July to scrap the floor limit for bank lending rates, and a guideline in December for piloting negotiable deposit certificates on the interbank market.

As for forex reform, Zhou said the central bank will "significantly cut intervention on the forex market" if targets for forex reform are realized step by step and when the right conditions are in place.

The international forex market will see some abnormal fluctuations as major countries adjust their currency policies, said Zhou. As a result, China has to be discreet about the spillover effect, he noted.

Data showed the Chinese currency, the yuan, had appreciated by more than 12 percent by January this year after the central bank deepened reforms to the yuan's exchange rate formation mechanism back in June 2010. However, the currency headed toward months of depreciation against the US dollar after the central parity rate of the yuan hit a new high against the dollar on Jan 13 at 6.095.

Analysts have forecast that greater two-way fluctuations of the yuan may become a normal trend in the future.

"If the market fluctuates too much resulting from short-term opportunistic forces, we will make moves; and if the market is stable, we could speed up the reform a little bit," Zhou said.