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China plans to

liberalize bank

interest rates

BEIJING: China plans gradually to liberalise interest rates, giving banks greater freedom to set their rates and improving the ability of the central bank to control the economy, the China Daily said on Sunday.

Currently the central bank, the People's Bank of China, sets rates for almost all lending and saving.

As a result, nearly all of China's banks are losing money because the inflation-linked rates they must pay on deposits of three years and above are far higher than those on their loans.

An unnamed official of the central bank gave no timetable for the freeing of interest rates and economists have said this could take some time despite repeated central government pledges to launch open market operations.

In the first stage of the liberalisation of rates, controls would be lifted on interest rates in the interbank market, the paper quoted the official as saying.

For this to happen, three conditions must be met -- the setting up of a unified interbank market, rules drafted to govern this market and domestic financial institutions must improve their assets to liabilities ratio, he said.

In the second stage, bank lending rates would be gradually liberalised, with the central bank setting a ceiling and floor for rates and allowing banks to set their own levels within that range, he said.

In the third and final stage, the central bank would set only the rate for one-year term deposits, allowing banks to set other rates, he said.

The speed of this liberalisation depends on how fast state firms are transformed and how fast the banks can improve the quality of their assets, he said.

A Chinese economist said at the weekend that current fixed interest rates were not good for troubled commercial banks which must hand out policy loans to state-owned enterprises -- but borrowers were resisting increases in the rates.

"The borrower has the right to decide interest rates," he said.

State firms are in a poor financial situation and do not want a higher interest rate burden, he said.

They must reduce their bad loans and depend less on the state commercial banks, he added.

A large proportion of borrowing in China is conducted outside the state banking system, by firms lending to each other or banks funnelling money to non-banks, which then lend it at unofficial market rates.

These unauthorised rates charged on loans are as high as 25 percent a year, more than double the rate set by the central bank, economists say.-Reuter