Feb. 26 (Bloomberg) -- China’s central bank will remove a cap on foreign-currency deposit rates in Shanghai’s free-trade zone from March 1 in its latest effort to speed up interest-rate deregulation.
The ceiling will be lifted for deposits of less than $3 million inside the zone and applies to accounts of companies registered in the zone as well as individuals working there for more than one year, according to a statement from the Shanghai branch of People’s Bank of China. China in 2000 began allowing financial institutions to freely negotiate interest rates with clients for deposits of $3 million or more.
Lifting restrictions on foreign-currency deposits adds to China’s push to give markets a “decisive” role for allocating resources in the world’s second-biggest economy. Shanghai’s free-trade zone was inaugurated in September as a testing ground for market policies that reduce government controls in areas including interest rates and yuan convertibility.
“It’s a key step, whose success will pave the way for more interest rate liberalization in the zone,” Zhang Xin, head of PBOC’s Shanghai branch, said at a press conference today. “Banks need to set up risk management systems to prevent significant outflows of foreign-exchange deposits and severe volatility in interest rates on the deposits.”
The policy will be eventually expanded nationwide, two people familiar with the matter told Bloomberg News. The China Securities Journal reported the planned removal of the cap on its website late yesterday.
Industrial & Commercial Bank of China Ltd., the nation’s largest lender, currently pays 0.8 percent on one-year U.S. dollar deposits, while the central bank’s current cap is 3 percent. The last time China’s central bank adjusted the ceiling on foreign-currency deposit rates was in May 2005, according to its website.
The zone has about $1.2 billion in foreign currency deposits of less than $3 million, and about $4.8 billion in total foreign currency deposits, according to Zhang.
The central bank said in an “opinion” published on Dec. 2 that it would remove the foreign-currency deposit cap in the free-trade zone “when conditions are ripe” as it pledged a reform of foreign exchange management.
ICBC fell 0.3 percent in Shanghai at the 11:30 a.m. local time break. Smaller lenders advanced, with Ping An Bank gaining 0.9 percent.
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