Interest rates of small-scale foreign currency accounts to be deregulated

China's central bank said on Wednesday it will completely liberalize interest rates for smaller foreign currency accounts in the China (Shanghai) Pilot Free Trade Zone, a key market for the reform process.

The People's Bank of China will remove the cap on deposit rates offered by banks on foreign exchange accounts holding less than $3 million within the FTZ from March 1, said the People's Bank of China Shanghai Head Office in a statement on Wednesday.

The existing upper limit for foreign currency deposits is no more than 1.5 percent for current accounts. Bank of China Ltd on Wednesday offered a 0.75 percent rate on one-year fixed US dollar deposits. The rate at Bank of Communications Ltd was 0.8 percent, HSBC Holdings Plc offered 0.95 percent and Citigroup Inc was giving 1.25 percent.

Analysts said market insiders said the central bank's move will not lead to chaos among lenders' interest rates under fierce competition for foreign currencies because they are reined in by cost and risk controls.

Wang Xinhao, head of the Shanghai branch of Shanghai Pudong Development Bank Co Ltd, said interest rates offered by lenders to foreign currency accounts within the FTZ will still be largely decided by the market - and may rise slightly.

The move will primarily benefit smaller accounts of foreign currencies in the FTZ because China had already liberalized lending rates and deposit rates on accounts holding more than $3 million from 2000, said Wang.

"The new demand emerging after the removal of the deposit interest rate cap will benefit clients' capital management and interest rate management, which will bring opportunities to commercial banks amid reform and transformation as well as helping lenders to increase their competence," said Wang.

Officials said the significant removal of interest rate ceilings may be a key step to a more liberalized and mature currency market for China. They are urging lenders to make an effort to control risks and curb the potential for significant capital outflows and massive deposit outflows driven by arbitrage.