Central Bank Governor Yi Gang Highlights Challenges for Chinese Interest Rate Reforms

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People’s Bank of China (PBOC) governor Yi Gang (易纲) has shed light on China’s ongoing efforts to reform its interest rate regime in a new article.

In the article entitled “China’s Interest Rate System and Interest Rate Marketisation Reforms” (中国的利率体系与利率市场化改革), Yi said a key problem for ongoing reforms lay in mechanisms for the formation and transmission of market-based interest rates.

“Interest rate marketisation must be capable of ‘opening’ and ‘formation’,” wrote Yi. “At present, a key contradiction for deepening interest rate marketisation reforms lies in barriers in the area of the formation and transmission of market-based rates.

“The reasons for this include regulatory arbitrage, the immaturity of financial markets, and other problems in the fiscal and financial systems that lead to market divisions, soft budgetary constraints for financing platforms and disorderly competition for deposits.

“The next step will be to continue to strengthen regulation, optimise the operating environment, harden budgetary constraints, dissolve financial risk, and further deepen the provision of beneficial conditions for interest rate marketisation reforms.”

Yi said that China had already succeeded in creating a “comparatively complete market-based interest rates system following over thirty years of reforms.”

“The yield curve is trending towards maturity, and can create beneficial conditions for effectively employing interest rates as a key adjustor for macro-economic operation,” wrote Yi.

Yi said that PBOC would “continue to deeply reform interest rate marketisation reforms in accordance with the strategic directives of the CCP central committee and State Council, and endeavour to improve market-based interest rate formation and transmission mechanisms.”

“One the one hand, we will continue to improve the central bank policy interest rate system,” wrote Yi.

“We will continue to consolidate a central bank policy interest rate system that makes use of open market operation rates for short-term policy rates, and employs medium-term lending facility rates for medium-term policy rates.

“We will endeavour to improve interest rate corridor mechanisms, and achieve full procedure electrification of standing lending facility (SLF) operations in an orderly manner.

“On the other hand, we will continue to strengthen market benchmark rate development. We will optimise the loan prime rate (LPR) quote formation system, expedite quoting banks to increase the quality of their quotes, and conduct assessments of quotes.”

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