Chinese financial reforms

["Lisa & Ian Murray" <seamus@xxxxxxxxxxxxx>]

http://www.iht.com/IHT/TODAY/THU/FIN/chicon.2.html
Paris, Thursday, July 20, 2000
China Plans Easing on Currency And Rates


By Thomas Crampton International Herald Tribune

HONG KONG - China's central bank governor affirmed plans Wednesday to loosen
currency controls and set a three-year deadline for market determination of
interest rates - the most concrete blueprint yet for financial sector
reform.
Most interest rates in China are set by the central bank, which uses them as
a tool to control the currency and keep foreigners out of domestic stock and
bond markets.

Many of the changes announced Wednesday would come as a consequence of
admission to the World Trade Organization, but analysts said the strength
and timing of the comments had come as a welcome surprise.

''We expect most of this work will be completed within three years' time,''
Dai Xianglong, China's central bank governor, said at a press conference in
Beijing. ''I give this timetable without any reserve.''

For interest rates, the government will start by relaxing its grip on rates
that banks pay on foreign-currency deposits, allowing them to move more in
tandem with market rates, Mr. Dai said.

''This was the first time we have heard the central bank governor say that
both interest rates and the currency will be liberalized at the same time,''
said Dong Tao, a Hong Kong-based senior regional economist for Credit Suisse
First Boston. ''As the door to China's financial markets opens, it is
natural for the determination of interest rates to be passed to market
mechanism.''

In the next step, Mr. Dai said, interbank rates and so-called securities
market rates - in other words, what banks are allowed to pay on certificates
of deposit and other money-market instruments - would be allowed to
fluctuate more freely.

Flexible interest rates on loans are to be introduced in rural areas,
followed by a loosening of lending rates in urban areas.

Interest rates for large fixed-term deposits at urban banks will then be
permitted. But full liberalization of deposit rates for other bank accounts,
including savings and checking accounts, will require ''further study,'' Mr.
Dai said.

''We will be especially cautious about deposit rates,'' he added.

For China's currency, Mr. Dai said that, while the yuan's trading band may
be widened soon within the current ''managed float'' system, there is no
time frame for letting the currency float freely.

''Recently, some experts at home and abroad have suggested increasing the
flexibility of the exchange rate,'' Mr. Dai said. ''It's worth studying, but
we haven't decided to change the managed-float rate.''

This announcement is part of China's preparation for a return to the former
policy of allowing a tightly controlled float of the yuan, said Guonan Ma,
chief regional economist at Merrill Lynch in Hong Kong.

''They are paving the way for the returning to a managed float system,'' Mr.
Ma said. ''Formally they may not make a policy change, but it does mean they
will allow greater flexibility and leeway for the currency.''

About three years ago, before Asia's economic crisis, China ran a
managed-float currency regime conducted under central bank management that
allowed the currency to vary slightly against the U.S. dollar.

As the economic crisis forced currency devaluations across Asia, China
tightened its exchange-rate policy to an unchanging peg against the dollar.
Applauded as an act of regional responsibility, China's control of its
currency was seen as a bulwark for stabilizing the region's currencies.
Economists and regional finance ministers frequently warned that a
devaluation by China would kick off another devastating round of
devaluations.

After remaining virtually unchanged for three years, many economists now say
the currency should be allowed to move again. ''The sooner they loosen up
the exchange rates, the better,'' Mr. Ma said.