China's foreign currency market has taken on a new look since foreign currency interest rates were freed up on September 21. The reform may guide the process of freeing the interest rate of renminbi(RMB), an article in the Beijing-based Securities Daily said.
The interest rate of foreign currency in China is stepping in line with the international financial market.
Before the interest rate was freed, China's foreign exchange business had long been isolated from the international market, and the adjustment of interest rates always lagged behind those of international markets.
The United States raised its interest rates six times during the bullish period of international financial markets since last year, while China only lifted its foreign currency interest rate once -- on May 29 this year.
A wide gap subsequently developed between the foreign currency interest rates in China and the international market. While the basic interest rate of the United States Federal Reserve has hit a new high of 6.5 percent, the interest rate of one-year term US dollar deposits in China was only 5 percent.
This rate, however, reached 5.5 percent after September 21, when the China Association of Banks lifted foreign currency deposits interest rates.
The change also marked the reform of the procedure to formulate interest rates. The Bank of China used to have the mandate of the People's Bank of China, the country's central bank, to lay out the rate. Now it is set by the China Association of Banks and then promulgated by the People's Bank of China. Meanwhile, the interest rate on fixed large-amount foreign currency deposits and foreign currency loans is decided by financial institutions on their own.
The floating of interest rates is changing, too. Commercial banks used to calculate the fluctuation of foreign currency interest rates with percentages, a method of counting the fluctuation of RMB. After the interest rate was freed up, they began to adopt the internationally practised basic points method. Financial institutions can now float the interest rates of the US dollar, Hong Kong dollar or euro deposits 10 points above the basic point announced by the China Association of Banks.
The settlement of interest is also shifted to conform better to international convention and the central bank has lifted the ban on commercial banks to collect additional fees. For example, apart from normal interest, banks can charge their clients for the pledge to lend money.
The administration on foreign currency interest has been strengthened. The central bank has revised some key rules that direct foreign currency business in order to keep up with the development of international finance and provide effective supervision of the market.
Commercial banks are better able to run foreign currency business. When the interest rate was fixed by the central bank, there was little room for commercial banks to make money in foreign currency transactions.
Now the interest rate is integrated with the market, these banks have the leverage to improve their performance and make more profit. Many commercial banks have now set up special departments to deal with the interest rate business.
International practice on the management of interest rates is now being phased in by domestic banks. They have become more concerned about the trend of international financial markets and take into account the fluctuation in international markets when setting their own interest rate.
For example, commercial banks have begun to refer to the information of Libor (London Inter-bank Offered Rate) since September 21. The floated interest rate of foreign currency loans and large-amount deposits is fixed on the basis of Libor.
Commercial banks now have some rights to decide the foreign currency interest rate of their own accord and the Bank of China no longer has the privilege to formulate the interest rate. The China Association of Banks only fixes the interest rate of seven kinds of foreign currencies, including the US dollar, Hong Kong dollar, euro and Japanese yen. It is up to commercial banks to set the interest rates of other currencies after considering cost, return, risks and market competition.
(China Daily 10/25/2000)