Time may be right for rate reform: PBOC chief

Conditions in China are "basically mature" for interest rate liberalization and the creation of a deposit insurance system, People's Bank of China Governor Zhou Xiaochuan wrote in an article on Tuesday.

"The results of the restructuring of commercial banks have eliminated their financial weakness and laid the key foundation as we move forward to the next round of interest rate liberalization," Zhou wrote in the central bank-operated China Finance Magazine.

Meanwhile, Zhou said, deposit insurance was an important component of the "financial safety net" in risk control and resolution amid the global financial crisis.

He added that the authorities are studying the launch of such a system when conditions mature.

Deposit insurance protects bank depositors, in full or in part, from losses caused if a bank runs into trouble or fails.

Hu Xiaolian, vice-governor of the central bank, told a recent news briefing that the establishment of such a system is a pre-condition for interest rate liberalization, because it would help keep the banking system stable amid intensifying competition.

Zhou did not give a specific timetable for these reforms.

Economists see market-based interest rates as a key element of China's reforms that would help boost domestic consumption.

Domestic deposit rates were negative for a long period until last month, when the inflation rate finally fell back below the one-year fixed deposit rate.

Li Daokui, former adviser to the central bank, said in a speech at a forum last weekend that the State-owned banks are "dinosaurs" that are now big enough to fend for themselves.

"Banks have high profits, and we don't need to worry about protecting them," Li said.

However, concerns persist that that liberalized interest rates will unleash competition in the banking system and hurt smaller lenders, or even drive some out of business.

Zhou also wrote that China should open up its financial markets, enhance the two-way flexibility of the yuan and gradually open more channels for outbound capital flows and push forward the opening of the capital account.

EFSF investment

Officials with the PBOC's research bureau said in another article in the magazine that China should buy more bonds issued by the European Financial Stability Facility, even though the eurozone bailout fund's credit rating was lowered.

In January, rating agency Standard & Poor's cut its credit rating of the EFSF by one notch to AA+.

But Ji Min, director of the central bank's macroeconomic research department, said the EFSF is still a major tool for Europe to fight the debt crisis, so returns on its bonds are stable.

Meanwhile, buying more EFSF bonds will give China more leverage in dealing with bilateral trade with Europe, he said.

Valuations of some European banks have fallen significantly, which offers a good opportunity for China to invest directly in these banks, he said.