by William Wesnofske
New details representing another step toward China becoming a more market-driven economy were released last week, when the head of China’s central bank announced its plan to free-up interest rates in the near future in order to allow the establishment of the first privately owned official banks.
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Officials hope that higher deposit rates will help put money into the pockets of ordinary Chinese savers, make the banks evaluate risks more carefully, and direct lending to privately owned firms. Zhou Xiaochaun, governor of the People’s Bank of China, expects this process to be rather quickly implemented. He said: "The final liberalisation of deposit rates is the last step of interest-rate marketization. Since many other interest rates have been liberalised, deposit rate liberalisation is definitely on our agenda. I personally believe it’s very likely to be achieved in one or two years."
Mr. Zhou is pressing the central bank to remake the Chinese economy so it is based more on domestic consumer demand, instead of exports and capital intensive industries at home. The aim is to give standard-net-worth people more money to spend, due to banks competing on deposit rates.
With funding being a serious problem for small businesses at the moment, the boost of the cost of funding for banks should require lenders to further analyze risks, and allocate more funds to private firms that are more willing to pay higher rates.
This process needs to be done carefully though, as previous bank-deposit liberalisation has led to financial crises, as seen in the US during the 1980’s. As banks compete for funds, their costs are raised, leading them to make risky loans that sometimes end up badly.
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