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China launches move to market driven rates

SHANGHAI: The start of open-market operations by China's central bank this week is by far the most important step Beijing has ever taken towards establishing market-driven interest rates, analysts said on Thursday.

The operations, in which the People's Bank of China indicates its monetary policy direction by buying or selling treasury bills, might lead to market-driven interest rates in China in two or three years time, they said.

The official Xinhua news agency reported on Wednesday that the central bank on Tuesday kicked off the operations by purchasing 290 million yuan ($34.8 million) in treasury bills from state-run commercial banks.

Officials at the central bank have declined to comment on the new operations, which went into effect April 1.

"By this purchase, the central bank was possibly telling the financial market that short-term money supply was sufficient and that it favoured lower interest rates," a trader on China's national interbank renminbi market based in Shanghai said.

"This was the first time it has given an indication as to its currency policy in real time," he added.

"The government's monetary policy will become much more transparent with the start of open market operations," said a senior economist at Shanghai's Fudan University. "This will help free interest rates and might lead to market-driven rates in two or three years at the earliest."

Analysts said previous efforts to reform control of money supply and interest rates had involved changes to the administrative methods used by the central bank, with no loosening of direct control.

Currently, the central bank exerts control mainly by setting loan quotas for state-run commercial banks and doing discount and re-discount business with the banks.

"Administrative controls have time and again caused sharp fluctuations on the financial markets because they generally lag far behind market needs," said a Chinese banking analyst.

"With the open market operations allowing for fine tuning, policy adjustments will be more timely and will become a major factor in stabilising the markets," he added.

Xinhua said the operations were launched against the background of China's swift economic development with a rapid increase in financial institutions and tools.

"Quite a number of financial institutions no longer rely on the central bank for loans, which makes traditional means of macro-economic control by the central bank less effective," the agency said.

It said the operations would also expand the scope of the central bank's macro-economic controls and strengthen the management of currency, loan supply and capital distribution.

But analysts said the operations were unlikely to have an immediate major impact on China's money supply and interest rates partly due to the limited number of tradeable T-bills on the market.

China has so far this year issued 89.5 billion yuan ($10.7 billion) worth of tradeable short-term T-bills, the key tool used by the central bank to conduct open market operations.

The official media has said the central bank has been preparing for the open market operations since 1993. An important step in its development was the establishment of a national interbank renminbi market in January this year.-Reuter