Chinese Official: Deposit Rate Reform Is in the Works

China

China’s reform effort is continuing as more changes need to be implemented before the economy can both restructure itself and quicken the pace of growth. Zhou Xiaochuan, head of China’s central bank, pointed in recent statements to further yuan liberalization in hopes that the currency will fluctuate more as a result of real market forces. He also commented that the government is looking at a plan to loosen deposit rates in the somewhat near future.

Deposit rates are widely seen by economists as a crucial barrier still existing between China and more meaningful reform. The interest rates that banks many pay depositors are controlled by the government, which, in an economy fraught with savers, has wide ramifications. While the government has allowed lenders to compete amongst one another, allowing them to lower rates in line with market forces, the policy may not be wholly effective until deposit rates follow suit.

In cities like Wenzhou, where interest rates remain high despite liberalization, a 20 percent borrowing rate isn’t likely to inspire would-be entrepreneurs when even the current 3 percent deposit rate promises a safer bet on returns. Moreover, according to the South China Morning Post, lenders aren’t allowed to accept deposits to deploy in the use of lending. Instead, they must rely on shareholder capital to finance their lending operations. With Chinese savers constantly planning for a future with little — or at least less in the way of government retirement help — until the spread between deposit rates and lending rates tightens up, the reform effort isn’t likely to be at its maximum efficiency.

A growing number of policy makers are also looking at that very social benefit system as a point of reform that could contribute to the reform effort. China’s current benefit structure, the hukuo system, compels citizens into a entitlement system based on where they were born.

Large cities are at an advantage, offering a richer amount of benefits, and because migrant workers aren’t eligible for these, they often return to their place of birth in order to take advantage of what’s given to them. This has created what some economists think is a very stifled labor market and should the government act to change this, the economy could benefit largely because of it.

Kam Wing Chan, a professor from the University of Washington, spoke recently about how a more fluid system wouldn’t exactly burden the government, either. “At the beginning of the transition, those [migrant] workers are net contributors to the economy, just like the undocumented immigrants in the U.S.”

As China’s aging population is giving way to a new generation of younger workers, the costs associated with these people would be low, Chan notes, given that they will have fewer children, and thus fewer associated economic needs. Still, restructuring China’s economy is going to take time, and the effect of many reforms won’t be immediately obvious, especially as businesses and manufacturers adjust to global demand that is perhaps tighter than they had anticipated during China’s stimulus-fueled growth.

Deposit rates remain of the essence in making China’s economy more sound and dynamic — and if Xiaochuan’s remarks on their future come to pass, then there is reason for short term optimism. The ability for deposit rates to compete with other forms of savings vehicles will likely prove a major catalyst as China’s economy changes direction.

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