PBOC to loosen rein on money
Friday, June 16, 2000
WILLIAM KAZER in Beijing
The mainland will press ahead with liberalizing interest rates and gradually make its currency convertible after joining the World Trade Organization, according to central bank chief Dai Xianglong (photo).
The governor of the People's Bank of China gave no timetable for either goal, but his remarks were the latest sign that Beijing wanted more flexible interest rates and still saw currency convertibility as an objective despite the devastating impact of the Asian crisis on some of its neighbors.
The mainland must "press ahead with interest rate liberalization", the central banker said.
The central bank should set a benchmark rate, use the domestic money market as a "transmission vehicle" and have the market determine deposit and lending rates, he said.
The central bank at present fixes bank deposit rates and allows banks a small degree of flexibility in lending after setting a benchmark level.
Economists have long argued the mainland needed a more flexible interest-rate system to allocate capital more efficiently, by letting banks offer loans that more closely reflected the creditworthiness of the borrower.
Better-managed companies at present pay nearly as much for bank funds as riskier companies.
The central bank's monetary policy committee, after its April meeting, was quoted as saying it wanted to set up a mechanism to liberalize interest rates.
Mr Dai was far more cautious with his view of currency convertibility, and he described financial globalization as a "two-edged sword" that could unleash huge capital flows which could deprive some countries of their independence in economic management.
"The June 1999 communique of the G8 summit meeting claimed that globalization makes the world more open and more vigorous, creates jobs and improves the general living standard," he told a business gathering.
"However, globalization also brings instability and greater risks for some families and society as a whole."
Despite his serious concerns, Mr Dai also appeared to be signaling that entry to the WTO, expected this year, would give some momentum to the long-term effort to make the currency fully convertible.
"With China's accession to the WTO, we will press ahead gradually with the process of capital account convertibility," he said.
The yuan is convertible on the current account, which covers trade, though Beijing maintains controls on the capital account, which tracks investment funds.
Beijing has had second thoughts about making the yuan fully convertible since the Asian financial crisis, when wild swings of so-called "hot money" took a heavy toll on many currencies around the region.
Mr Dai vowed the mainland would maintain sound monetary policies that would ensure the value of the yuan under its managed float regime.
The state would also relax its grip on government owned banks, according to Mr Dai, though it would remain as the controlling shareholder.
State commercial banks would be recapitalized in a timely fashion, he said, suggesting some would be allowed to sell shares to the public.
So far only Shenzhen Development Bank and Shanghai Pudong Development Bank have been allowed to list shares but other banks are known to be waiting for the green light to float. |
