According to a report from China’s think-tank State Information Center, under the National Development and Reform Commission, Beijing may increase banks’ required deposit reserve ratios (RRR) from the present level of 19.5% to 23%, as well as implement further hikes in interest rates. At the same time, the country has, according to a report in the China Daily, begun to experiment with allowing certain banks to determine their own deposit interest rates.
Reuters reported that the think-tank’s report, published in the China Securities Journal, said, “The tool of [RRR] will be the first choice for the central bank.” It also said that the country would allow the yuan to appreciate further as one of its methods of fighting inflation, which has been on the rise for some time.
The country’s central bank has also begun a pilot program that allows a select few of China’s banks to set deposit interest rates themselves. Some city commercial banks, the China Merchants Bank among them, are being allowed to use the program to compete for large corporate client deposits by means of a “price bidding system.”
Usually there is a spread of approximately 3% between the government-determined deposit rate ceiling and lending rate floor. This spread makes up much of the banks’ revenues, and governs all deposit funds except for those locked away for more than five years. Under the pilot program from the People’s Bank of China (PBOC), the banks may instead set the rates for deposits maturing in less than five years. PBOC has been promising to revamp its interest rate-setting system to be more market based, as a means of stimulating competition among its banks.
While the pilot is currently limited to only a few small lenders with limited client bases, as PBOC evaluates its impact and watches for any potential problems, Zhou Xiaochuan, governor of China’s central bank, promised late in 2010 that interest rate liberalization would see “noticeable progress” in the future.