China takes step towards interest rate liberalisation

China has taken a step towards liberalising interest rates by allowing foreign currency deposit rates to be freely set in its new Shanghai free trade zone (FTZ), the central bank said Wednesday.

From March 1, banks in the FTZ will be able to set their own rates for foreign currency deposits, the Shanghai branch of the People's Bank of China said in a statement on its website.

The move does not apply to deposits in China's yuan currency.

China began allowing banks to decide their own lending rates in July last year, but still sets deposit rates by administrative order.

The move for the FTZ effectively scraps an upper limit on interest rates for foreign currency deposits of less than $3.0 million, state media reported on Wednesday.

"After relaxing the cap, the FTZ will be the first in the country to realise full liberalisation of foreign currency deposit rates," the central bank statement said.

"This is an important step in interest rate liberalisation reform and the pilot scheme in the FTZ will accumulate... experience for rolling out this reform nationwide."

The bank said it would closely monitor capital flows into and out of the zone.

China set up the FTZ in September last year as a testing ground for its market reforms, including interest rate liberalisation and full convertibility of its yuan currency.

But foreign firms have been hesitant to set up in the FTZ, given a lengthy "negative list" of what is barred there and an open-ended deadline to introduce financial reforms.

The American Chamber of Commerce in Shanghai said Tuesday that almost two-thirds of member companies responding to a survey believed the FTZ was a positive development, but only 15.8 percent were considering establishing operations there.