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China says Conditions Ripe to Liberalise Interest Rates

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Source: AFP

The head of China’s central bank said conditions are ripe for Beijing to liberalise interest rates, which would boost domestic consumption as the nation’s exports are hit by weaker overseas demand.

Beijing has cut the nation’s growth target for 2012 as its export-driven economy slows, and a key policy focus this year will be on expanding demand at home.

In an article published in China Finance ‒ a magazine backed by the People’s Bank of China ‒ Zhou Xiaochuan said “the conditions to further push forward with interest rate liberalisation are basically there.”

“The central bank will…continue to actively push for this,” he wrote in the magazine, which was distributed to readers on Tuesday.

China’s central bank currently sets interest rates ‒ which banks have to adhere to ‒ but policymakers control the way they can channel and allocate capital.

Analysts say this has led to imbalances in the economy, with savers getting small returns on deposits and corporate entities able to borrow at low rates and invest in projects they might not otherwise have engaged in.

The interest rate regime “artificially suppresses consumption and artificially boosts production. If you want to boost consumption, you should reverse that,” said Patrick Chovanec, a professor at Tsinghua University.

Liberalising the rate regime would also boost competition between banks.

China’s economy has slowed because of falling demand in debt-wracked Europe and the United States. Last month, the country saw its biggest trade deficit since records began, while manufacturing activity is plodding.

Economic growth hit 9.2 per cent last year, slowing from a blistering 10.4 per cent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.

Earlier this month, Chinese Premier Wen Jiabao cut the country’s growth target for 2012 to 7.5 per cent, down from an 8-per cent target last year.

In the article, Zhou also reiterated that China would further open up domestic financial markets and enhance the flexibility of its yuan currency exchange rate ‒ a key sticking point with Beijing’s major trading partners.