Shanghai foreign currency deposit rates to be market-driven

China will expand a pilot program on foreign currency deposit rates previously confined to the Shanghai free trade zone (FTZ) to the whole of Shanghai effective Friday, the Shanghai branch of China's central bank announced on Thursday, marking a step forward toward the liberalization of the interest rates.

The pilot program will be expanded to all of the financial institutions based in Shanghai, the People's Bank of China Shanghai branch said in a statement, which will allow them to voluntarily set the foreign currency deposit rates for small accounts in line with the market conditions.

This move only applies to accounts that hold less than $3 million and the expansion will be carried out in a gradual way, with the corporate accounts taking the priority, and then the individual accounts, it said.

The central bank removed in March the ceiling on the deposit rates for smaller foreign currency accounts in the Shanghai FTZ.

Shanghai will serve as a model when this move spreads to the whole nation, the central bank said, especially in respect of improving financial services to real economy and lowering the cost of allocating funds for companies and groups.

"Shanghai is traditionally seen as a forerunner for China's financial reform and it is now the pilot city in pushing ahead with the opening-up of the financial sector," Zhou Yu, director of the International Financial Studies Centre of Shanghai Academy of Social Sciences, told the Global Times on Thursday.

"Removing the cap on the deposit interest rates of foreign currency accounts is different from opening up capital accounts, so it won't raise many risks in terms of massive across-region capital flows. And it will surely make the market play its role in allocating capital," Zhou noted.

Despite the fact that this is so far the first pilot program to expand beyond the Shanghai free trade zone, analysts said it is in fact a small step.

"Since liberalizing the deposit interest rates on foreign currency accounts involves little difficulty, it's not a big step forward," Liu Shengjun, deputy head of CEIBS Lujiazui Institute of International Finance, told the Global Times on Thursday.

"As the yuan is yet to achieve full convertibility, how the foreign currency is liberalized has little to do with the yuan market," Liu said, noting China should accelerate the market-based reform of the yuan interest rates."