China goes for market interest, exchange rates

A Chinese central bank official said the country would strengthen the role of market forces in deciding interest and foreign exchange rates. Pushing for free floating interest rates is an important aspect of China's market reform, as the country has announced a "decisive role" in allocating resources, Yi Gang, deputy governor of the People's Bank of China (PBOC), told Xinhua in a latest interview. In a landmark policy document released by the Communist Party of China earlier this month, the country changed the wording for the role of market from the previous "fundamental" to "decisive". China has relaxed control over lending rates and rates for bonds and other financial products. Currently the deposit rate is the only one subject to central bank control, Yi said. "We will promote deposit rates determined by the market when conditions are mature," Yi said, explaining that "mature conditions" refered to finding a new benchmark to replace the current deposit rate cap set by the PBOC. A possible new benchmark is the SHIBOR (Shanghai Interbank Offered Rate), a quasi-Libor, and the central bank will consider relaxing deposit rate control when commercial banks get accustomed to using the new benchmark as the basis for pricing financial products, according to Yi. "We are very cautious about the issue as deposit rates have close bearing on numerous households," Yi said. Yi added that China should improve the mechanism for yuan exchange rate formation. China should step up market construction to provide more financial products for companies to have hedging optionss, according to Yi. The country should set up an exchange rate formation mechanism that is flexible and determined by market forces, while keeping yuan's rates generally stable, he said.