China will not scrap bank deposit rate ceiling soon

SHANGHAI - China will not remove the ceiling on bank deposit rates soon as a deposit insurance system should be in place before that will happen, the China Securities Journal reported on Thursday, citing a former central bank vice governor.

The scrapping of a ceiling on deposit rates would be the final step in China's interest rate liberalisation but that is unlikely to happen either this year or the next, Wu Xiaoling, former vice governor of the People's Bank of China, was quoted as saying by the official newspaper.

China's central bank removed controls on bank lending rates last week in a long-awaited move that signals the new leadership's determination to carry out market-oriented reforms and will help lower financial costs for companies.

The central bank has said that it planned to free up deposit rates eventually, but now was not the right time.

Wu said a sudden lifting of the deposit rate ceiling would likely result in rate wars among financial institutions to woo depositors, threatening the survival of small lenders.

She added that the launch of a deposit insurance system should be requisite for abandoning the deposit rate ceiling.

China's deposit rates are currently set at 110 per cent of benchmark rates.