Adviser urges interest rate reform completion by 2017

China needs to complete interest rate reform by 2017 before it can open up the capital account to make it fully convertible by 2020, an adviser to the central bank said over the weekend.

The emergence of shadow banking activities has to a large extent forced the country to further liberate the interest rate as soon as possible, which should be completed by 2017 in order to be in line with the country's exchange rate reform, Chen Yulu, the president of Renmin University of China and a member of the central bank's Monetary Policy Committee, said Sunday.

To liberate its exchange rate, China needs to achieve convertibility of the yuan under the capital account between 2017 and 2020, Chen said.

At present, the yuan is convertible under the current account for trade in goods and services. But the capital account, which includes foreign indirect investment, portfolio investments, the reserve account and other investments, is still strictly managed by the State due to concerns about abrupt capital flows moving in and out of the country.

"Actually the reforms of the interest rate and the exchange rate could progress at a faster pace because of pressure from the financial environment," said Zheng Jianmin, a business professor with the University of International Business and Economics.

"Pressure from surging shadow banking - or credit flows beyond traditional bank loans - and from hot money inflows partially caused by higher interest rates in China and appreciation of the yuan are two factors that call for a faster reform of the interest rate and the exchange rate," Zheng said.

In March, ratings agency S&P estimated that outstanding Chinese shadow banking credit totaled 22.9 trillion yuan ($3.7 trillion) by the end of 2012, equal to 34 percent of on-balance-sheet loans and 44 percent of GDP.

On Friday, the National Development and Reform Commission announced reform guidelines for 2013 which include pushing forward market-­oriented reforms of interest rates and promoting convertibility under the capital account. But the guidelines didn't provide a detailed timetable.

The interest rate liberalization should be achieved steadily instead of quickly since the capital demand differs in different regions of the country, said Tan Yaling, head of the China Forex Investment Research Institute.