China's central bank inches toward market
BEIJING - The People's Bank of China (PBoC) has unveiled further steps to promote the liberalization of its interest rate regime. Analysts say the steps demonstrate a firm commitment to press ahead reforms will help banks adopt to a market economy environment, but cause short-term difficulties among weaker lenders.
The central bank on Monday listed the moves in the pipeline in a report published on its website. The bank said it would unify interest rate policies of all financial institutions, revise related rules and regulations, and help banks improve their skills in pricing loans. The steps would also promote the development of financial markets and enhance the PBoC's own ability in guiding interest rates and supervising 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 have blunted Chinese banks' sensitivity to market risks, analysts say. After setting free interest rates in the interbank market and those 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 the 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 now says it will further liberalize such rates by simplifying the administration of rates it continues to manage and allowing the rates on certain types of deposits smaller than US$3 million to float freely. The bank said there is a need for banks to enhance their ability to price loans according to risk factors and costs so as to prevent price undercutting.
March to Shanghai
The PBoC may consider establishing a "super branch" in Shanghai to bring it closer to the marketplace. The move, reported in Monday's edition of the Beijing Times newspaper, got its first confirmation on January 20 from People's Bank of China Shanghai branch head Hu Pingxi. Hu was quoted as saying that the central bank aimed to "consolidate its resources and improve its operational efficiency" by setting up such a body in Shanghai.
The Shanghai "super branch" will assist the central bank's decision-making processes by being in a position to obtain more relevant market information. But the Beijing headquarters of the central bank and its Shanghai branch remained tightlipped about the report. A leading official from the Shanghai Banking Association said that although he had not yet seen any official documents related to the decision, it would significantly propel the city's drive toward becoming an international financial center.
The official, who wished to remain anonymous, added that the proposal to set up such a branch in Shanghai was several months old. "It is not proper to call it a headquarters because it will actually be a subordinate with more privileges than any other local branches of the central bank," he said. According to him, it would be on the lines of the Federal Reserve System in the United States, with the Federal Reserve - the central authority - based in Washington and the Federal Reserve Bank of New York playing a leading monetary role only subordinate to the central authority. "It is also a necessity for the central bank because the financial market in Shanghai is more active and will allow the central authority to make accurate and quicker decisions," he said.
Beijing will continue to take care of monetary policy issues, while departments at the market operation level, such as the credit management bureau and the anti-money laundering bureau, will be relocated to Shanghai, confirmed the official. "It is a great support to the city and Shanghai's financial leadership will be further enhanced," said Han Hanjun, an economist and director of the Research Office of Financial Theories under the Shanghai Academy of Social Sciences.
He revealed that insiders are using the term "second headquarters" to refer to the body to be set up in Shanghai and he learned that a deputy head of the central bank would be stationed in Shanghai to take charge of it. All headquarters of the central bank and the "big four" commercial banks are based in Beijing, which hinders Shanghai's ability to obtain a solid financial position in the country, let alone globally, Han added.
By the end of 2004, the total assets of banking institutions in Shanghai reached 2.61 trillion yuan (US$315.6 billion), 8.3% of the country's total according to data released by the Shanghai Banking Regulatory Bureau. Assets of foreign banks in Shanghai totaled 315.8 billion yuan, achieving a yearly growth of 40.3% and accounting for 12.2% of the city's total.
China Construction Bank Corporation (CCB) is the latest addition to the growing list of business entities seeking their fortunes in Shanghai. It recently announced that it set up its first fortune center in Shanghai on the weekend to offer professional financing service to high-ranking individual clients. The move is taken as a new step for CCB to explore the market in China after it was reformed into a state-controlled share-holding bank in September 2004.
The CCB, the financially healthiest bank of the country's Big Four that include the Industrial and Commercial Bank of China, the Agricultural Bank of China and the Bank of China, is improving its service to explore the market in the new year, said Zhang Enzhao, board chairman of the CCB. Zhang has confirmed that the CCB is bracing for a public listing later this year, which makes the bank a pioneer in the Chinese government's ambitious program to reform the banking system.
(Asia Pulse/XIC/Nikkei)
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