In its report on China's monetary policy released on January 31 the People's Bank of China, the central bank, vowed to push the process of market oriented interest rates forward in a "progressive way".

The principles for the process, which have been followed by the experience so far, put the liberation of interest rates of the monetary market and bond market before that of deposits and loans. In the reform toward the marketized interest rates of deposits and loans, actions are expected to be taken first for foreign currencies, deposits and long term large sum deals, then for domestic currency, loans and short term small deals.

In 2005, the central bank will continue its efforts on having a rational and complete interest rates policy in place, improve the pricing system and strengthen the interest rates management regime.

According to the roadmap designed by the central bank, the last step toward a uniformed interest rates package for loans from all lenders will be made. The central bank believes that loans by credit cooperatives boost the rural economy if the interest rates of their loans are free of ceilings. But this, the central bank stressed, should be realized in a steady way.

The existing interest rates pricing system in credit cooperatives gives rise to monopoly and imposition of the highest rates allowed. This is partly responsible for active grey market for borrowings.

In the interest rate hike last October which was a surprise to the whole world, ceilings of interest rates for loans by commercial banks were removed. However, the interest rates for the loans from urban and rural credit cooperatives remained although they were geared up.

The central bank's report coincided with the State Council's release of its policy for further developing the country��s rural economy which highlights the reform on the rural financial system. It required that an overall blueprint for the reform of rural financial system be drafted as early as possible. It expects that rural credit cooperatives, after refurbished, would play a leading role while the Bank of Agriculture Development and the Bank of Agriculture offer better services for farmers. Market access and rules for rural financial institutions under various ownership will be in place and pilot projects will be planned as soon as possible.

As private lending market is active in rural areas, the central government decides to put these deals under its control and watch to protect borrowers and prevent financial risks.

For deposits, the central bank is also considering the market oriented interest rates. It needs to study the standardization and liquidity of deposits and loosen the minimum amount of deposits.

A complete and reasonable yields curve is a must for the reference of commercial banks in their pricing of medium and long term loans. This will not be possible until the structure of treasury bonds in various terms is improved and more financial products are available. Direct financing, especially the securities investment fund and corporate bond market will be encouraged. Commercial banks will be allowed to issue long-term debts tools and launch securities investment fund.

As the interest rates more depends on the market, the central bank will make its intereat rate control system more efficiently. Its monetary policy leads the interest rates on the market which in turn decides the interest rates of deposits and loans in financial institutions.

Foreign currencies dominated deposits in small amounts will be subject to simpler terms and classifications while those in large amount will have lower standards. The control over the interest rates of foreign currencies dominated deposits in small amounts is thought to be necessary in some certain time to follow.

Financial institutions are urged to further their reform on property rights and learn pricing techniques. They should lay a solid foundation for interest rates pricing. This includes perfect corporate governance, a management system for interest rate pricing and risks, an assessment system for risks premium, a system for internal transfer pricing and incentives, and internal capital control.

The central bank will strengthen its monitoring on the interest rate changes on the market. The central bank, its subsidiaries and its branches in provincial capital cities around the country comprise of a two layered monitoring network. They keep a close watch on interest rates on the market, make analysis, work out reports and issue the reports on a regular basis.

The central bank thinks it necessary to set up monitoring and feedback systems in its subsidiaries and branches to track private borrowings.

The central bank will offer technical support to financial institutions, especially urban and rural credit cooperatives, through training programs on interest rates pricing and risk management.

At the recent World Economic Forum, Chinese Vice Premier Huang Ju and Vice Governor of PBOC Li Ruogu reiterated that China need stable foreign exchange rates and had no plan of adjusting its exchange recently. They rebuked the complaint about China ��intentionally�� keeping its exchange rates down to protect its exports.

Huang warned against any speculations on RMB appreciation. Li said the central government would take "further actions" if it was necessary.

By People's Daily Online