Shanghai has received a verbal green light from the central government to become the country’s pioneer in the liberalization of interest rates.

Wu Xiaoling, deputy governor of the People’s Bank of China (PBOC), said this week the central bank had reached consensus on principles of interest rate reform and that Shanghai would get full support to initiate the process.

“We are considering canceling the ceiling on lending interest rates while maintaining controls on the bottom rates for commercial banks in Shanghai,” said Hu Pingxi, head of the PBOC Shanghai Branch.

Since the beginning of this year, the national regulations on domestic financial institutions have permitted banks to extend loans with interest rates 1.7 times higher than or 10 percent lower than the central bank’s guiding rates.

“We encourage any financial innovations with controllable risks to be tested in Shanghai, which is vying to become an international financial center,” Wang Huaqing, director of the China Banking Regulatory Commission Shanghai Supervision Bureau, said in an earlier interview.

Although details of the trial program in Shanghai are not yet available, municipality officials said last month that work to hasten interest rate flexibility in Shanghai would be conducted through 2010, when the city is expected to become an Asian financial hub.

Shanghai, among the first batch of mainland cities that opened to foreign financial institutions, has already strengthened its position in the domestic banking industry.

The outstanding value of loans extended by local banks accounted for 7.8 percent of the country’s total last year; for the deposit sector, the proportion was 7.9 percent.

Meanwhile, industry officials said the pending permission for local banks to float interest rates more freely on a trial basis would give them more time to price products according to market conditions. The banking sector will open fully to overseas rivals at the end of 2006.

(Shanghai Daily March 10, 2004)