The Bank of China (BOC) said recently that the deregulation of foreign-currency interest rates would not result in "price wars" between the commercial banks operating in the market, but admitted that it will pose more risks to the management and operations of smaller commercial banks.
"The deregulation and increase of interest rates are primarily measures taken by government regulators to keep the domestic banking sector in line with world markets," said Le Yan, deputy manager of the treasury department under the Shanghai Branch of BOC. BOC is a state-owned commercial bank that deals with the largest volume of foreign currency related businesses.
"I believe the commercial banks will make their own rational decisions over the interest rates on the basis of their performance, assets and risk-prevention skills," said Le. "And there should be no price wars over the interest rates."
But Le claims that the commercial banks could experience fiercer competition over potential borrowers who have good credit records after the deregulation.
"In this case, those smaller banks should be more careful and prudent as they face more volatile consequences from interest rate fluctuations," said Le.
He predicts that there will be more frequent interest rate adjustments in the upcoming period than in previous times, when rates were controlled by the central bank.
Starting from Thursday, the central bank -- the People's Bank of China (PBOC) -- has officially deregulated the interest rate for foreign currency transactions that are over US$3 million as a preamble to total deregulation.
The benchmark interest rate, set by the Chinese Banking Association, for one-year-long US dollar deposits worth less than US$3 million raised some 10 percent, from the previous 5.00 to 5.50 points, and the interest rate of other major currencies, such as euros and the Japanese yen, has also increased significantly.
But the interest rate for the pound and the Hong Kong dollar dropped slightly.
The association, comprised of the governors of 22 major domestic banks, was recently granted the power to decide interest rates over accounts worth less than US$3 million.
And earlier this year, Dai Xianglong, governor of PBOC, has set a three-year-long timetable for a full deregulation of the interest rates, including both the Renminbi and foreign currencies in the China market.
(China Daily 09/22/2000)
