The People's Bank of China (PBOC) announced plans to promote liberalization of its interest rate regime yesterday.

Analysts say they demonstrate a firm commitment to pressing ahead with reforms that are hoped to help banks adapt to a market economy environment, though they are expected to cause short-term difficulties for weaker lenders.

The central bank published a report on its website that said it would unify the interest rate policies of all financial institutions, revise rules and regulations, and assist banks in improving their skills in pricing loans.

They also aim to promote the development of financial markets and enhance the PBOC's ability to guide interest rates and supervise the market.

The bank has been loosening controls on interest rates in recent years. Such controls have distorted the price of money, reduced the efficiency of the financial sector and blunted Chinese banks' sensitivity to market risk, analysts say.

After freeing up interest rates in the interbank market and on large-sum foreign currency deposits, the central bank removed the upper limit on lending rates by commercial banks late last year. It allowed them to lower rates on deposits, but kept the ban on raising deposit rates.

The PBOC said it would promote liberalization of deposit rates by loosening threshold requirements on large deposit agreements. Interest rates on these are typically negotiated between the banks and institutional depositors.

As for foreign currency-denominated deposits, the central bank currently dictates rates for deposits smaller than US$3 million in a few major currencies, such as the US dollar and the euro.

The PBOC said it would further liberalize such rates by simplifying their administration and allowing rates on some kinds of deposits under US$3 million to float freely.

The bank said there was a need for banks to enhance their ability to price loans according to risk factors and costs, so as to prevent price undercutting.

(China Daily February 1, 2005)