The core issue of China's financial reform is interest rate liberalization, Cao Wenlian, director of the National Development and Reform Commission's International Cooperation Center, said in an interview prior to the opening of the Boao Forum.
Interest rate liberalization is a process of replacing existing interest rates controlled by the central bank with market-based interest rates. China's deposit and lending rates are still directly controlled by the central bank, basically the same as during the planned economy period.
Cao said that China must continue to push forward its financial reform after successfully carrying out the shareholding system reform. There are at least three more tasks to be accomplished in the process of the financial reform, including interest rate liberalization, greater capital account convertibility, and exchange rate marketization.
China's five major state-owned banks posted a total net profit of nearly 674.4 billion yuan last year, according to the banks' annual financial reports. Certain media outlets estimate that 70 percent to 80 percent of the five banks’ high profits come from interest earnings. Cao noted that the banking industry had experienced hard times before, and multiple factors have contributed to their rapid profit growth in recent years.
In a signed article titled "Interest Rate Liberalization: Next Focus of China's Financial Reform," Cao suggested that the country should seize the opportunity to speed up interest rate liberalization, free up deposit and lending rates, and achieve the liberalization of interest rates in around three years. The first thing it needs to do is to increase the downward floating range of lending rates from 10 percent to between 30 percent and 50 percent, and to improve domestic banks’ deposit and loan pricing as well as risk management capabilities.
