Bank execs urge interest rate reform

Top executives at China's leading joint-stock commercial banks said Wednesday that interest rate liberalization is essential for the country's economic development and financial reform.

Hong Qi, president and CEO of China Minsheng Banking Corporation, said that China should liberalize its interest rates in a bold way.

"The way we liberalize interest rates will be fundamentally different from the method in Western countries. We should liberalize interest rates first, work out what the obstacles are, and then remove the obstacles," Hong said at a panel discussing the country's financial outlook at the World Economic Forum in Dalian, Northeast China's Liaoning Province.

China has had tight controls over its interest rates in order to avoid financial risks such as vicious competition among commercial banks. The country removed the floor for lending interest rates in July, but kept the cap for deposit rates.

Hong said that China is now gradually pushing forward with interest rate reform, and hopes to minimize the negative effects that the change will have on the market.

Li Mingxian, president of China Guangfa Bank, said that China's financial market and most commercial banks are prepared for the country to remove the ceiling deposit rate, which currently stands at 110 percent of the benchmark rate set by the People's Bank of China, the central bank.

"The authorities have been controlling the financial market too much," Li said. "Interest rate liberalization will be a vital factor for the market to achieve efficient allocation of resources."

Hong said China's deposit rate cap could be removed in 2015, after the deposit insurance and bank closure systems are established.

William Rhodes, senior advisor to Citi and another member of the panel, said that China needs to carry out its interest rate liberalization plan in "a careful and coordinated manner."

Rhodes suggested that changes should be made in test fields first. "The opening up of the financial system is going to be done in a free zone, so Shanghai's new free trade zone will be very important," he said, noting that the zone could be the test field for innovative ways of dealing with the yuan, even including free convertibility of the currency.

Adair Turner, senior fellow at the UK-based Institute for New Economic Thinking, agreed with Rhodes, noting that China also faces the challenge of dealing with increasing debts and cheap credit.

"Every other developed economy that has had such a rapid increase in leverage has had some form of financial crisis and a major setback to growth," he said.

Turner said interest rate liberalization would help bring shadow banking - which has contributed to the growing debts - back into the formal and regulated banking system.