Shift is part of ongoing reform in China's financial sector, official of PBOC says

China is going to accelerate the freeing up of deposit interest rates, said the chief of the People's Bank of China at a forum on China-France financial cooperation on Tuesday.

Zhou Xiaochuan, governor of the bank, said the central bank is considering going further with interest reforms, particularly with deposit interest rates.

"China has been building a system for market-based interest rates in the past two decades," said Zhou. "More mechanisms, such as market-oriented pricing mechanisms, need to be established to lift the control on deposit interest rates. "

The central bank liberalized loan interest rates in July .

The control on deposit interest rates, however, is going to be removed gradually and prudently, said experts.

The bank widened the upper limit of the floating range for deposit interest rates to 1.1 times the benchmark interest rate in June 2012, constituting a major step toward total freeing up deposit interest rates.

"Many countries with successful experiences of free deposit interest rates removed the limit on fluctuations in a progressive manner," wrote Sheng Songcheng, chief of the statistics department of the central bank, in an article earlier this year. "It should be the same case with China, starting from long-term to short-term and from small to large deposits."

The central bank is guarding against risks in its caution against abrupt changes, said Guo Tianyong, a financial professor at the Central University of Finance and Economics. It is very unlikely that the fluctuation limit for deposit interest rates will be completely abolished before 2015, he added.

The trend toward more flexible interest rates has stirred up concerns that the profitability of China's banking industry will be severely hampered since about 80 percent of the profits are generated by net interest margins.

A report by Group 2012, a privately run economic research team, rebuffed the concerns in a recent report.

Since 1998, net interest margins at major Chinese banks floated between 2.2 percent to 3.2 percent. In 2010, 2011 and 2012, the average net interest margins of Chinese banks were 2.57 percent, 2.79 percent and 2.76 percent, near the average level of the past 15 years, said the report.

"The pricing scheme of interest rates will gradually move from a uniform standard regardless of costs to a differentiated mechanism based on the level of costs," said the report, "The rising forces (private banks, for instance), the increase in loans to micro and small enterprises and diversified portfolios will generate more profit and opportunities for China's banking sector."

China will step up efforts to institute full convertibility for yuan capital accounts, said Zhou. To achieve that goal, China must adjust its management on cross-border capital flows so that enterprises could reduce their costs in financial transactions and various kinds of investment activities.

Zhou also called for the simplification of the administrative approval procedures for the exchange rate management system, switching the emphasis from granting approval to supervision, from micro to macro management and from positive to negative lists.

He encouraged investment from Qualified Domestic and Foreign Institutional Investors, specifying that the approval system over the investment quantity and qualification of these investors could be revoked if necessary.