On December 17, 2010, Governor Zhou Xiaochuan of the People’s Bank of China (PBC) was invited to speak at the Caijing Annual Meeting titled the “2011: Forecast and Strategy”. Governor Zhou elaborated on promoting interest rate liberalization, a task outlined in the Proposal of the CCP Central Committee Concerning the Formulation of the 12th Five-Year National Economic and Social Development Program, including the backdrop of market-based interest rate reform, its progress and necessary conditions and a blueprint for the next stage reform.
Governor Zhou pointed out that interest rate, as a very important price, reflects the outcome of resource allocation and optimization. Market-based interest rate reform is the requirement of macroeconomic management, and should play a fundamental role in optimizing resources allocation in collaboration with market and resources. Pricing power is vital in the reform. Throughout the reform, due respect should be given to the autonomy of enterprises, diversified demands of customers and their judgment of risks and choices.
According to Governor Zhou, market-based interest rate reform takes time, and several conditions should be cultivated. In the next stage, efforts will be made to push ahead with the reform in a well-sequenced and consistent manner in accordance with the 12th Five-Year National Economic and Social Development Program. First, financial institutions with hard budget constraints should be allowed to price their products in a competitive market, while financial institutions with soft constraints will be excluded from self-pricing their products to some extent. Second, according to the requirement of macro-prudential regulation, criteria should be set for eligible financial institutions with hard constraints; while those enterprises that cannot reach the criteria are considered with soft constraints. Third, all entities should be on the market for fair competition, including commercial banks and customers. Fourth, consideration could be given to liberalizing the price of alternative financial products on a gradual basis. Fifth, efforts should be made to avoid excessive cross-subsidizing of bank products. Sixth, efforts should be made to strengthen customer education, so that customers will understand the pricing autonomy of enterprises and have the right to make choices and protect themselves. In the meantime, efforts should be made to continuously improve the credit information system of the central bank which provides services to customers. Seventh, efforts should be made to improve the self-regulatory market competition. Eighth, further efforts should be made to vest the pricing power with the market, and further improve risk pricing capacity of financial institutions.