China says time is ripe to liberalize interest rates

By Agence France-Presse
Tuesday, March 20, 2012 7:36 EDT
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A dressed-up sales assistant attempts to lure passersby into his shop, in Beijing  (AFP)
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China’s central bank chief says conditions are ripe for Beijing to liberalise interest rates, a move analysts say would boost domestic demand as the nation’s exports are hit by overseas turmoil.

Beijing has cut the nation’s growth target for 2012 as its export-driven economy slows, and a key policy focus this year will be on expanding demand at home.

In an article published in China Finance – a magazine backed by the People’s Bank of China – Zhou Xiaochuan said “the conditions to further push forward with interest rate liberalisation are basically there.”

“The central bank will… continue to actively push for this,” he wrote in the magazine, which was distributed to readers on Tuesday.

China’s central bank currently sets interest rates — which banks have to adhere to — keeping them artificially low and giving policy makers control over the way they can allocate capital.

Analysts say that if China relinquishes control over the rates and lets the market take over, banks would have to start competing against each other to attract customers, which would lead to higherdeposit rates.

“There is a lot of evidence to suggest that Chinese savers are target savers, and save with a target in mind, for example a house,” said Alistair Thornton, China analyst at IHS Global Insight.

Higher returns on their deposits would allow them to save less and still meet their targets — be they monthly or annual — which would free up more money for consumption, he said.

This is compounded by the fact that unlike some other countries, Chinese people are savers and tend not to borrow money.

Analysts say China’s state-owned banks are likely to be wary about interest rate liberalisation, as they earn most of their profits from the current central bank-set spread between lower deposit rates and higher lending rates.

If competition kicked in and banks increased deposit rates, that spread would narrow considerably, they say.

Economic growth in China hit 9.2 percent last year, slowing from a blistering 10.4 percent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.

Earlier this month, Chinese Premier Wen Jiabao cut the country’s growth target for 2012 to 7.5 percent, down from an eight percent target last year.

Agence France-Presse
Agence France-Presse
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