CHINA is waiting for a "suitable time" to relax controls on lending costs and then widen the range for deposit rates as it seeks to allow market forces to play a bigger role in setting interest rates, the People's Bank of China Governor Zhou Xiaochuan has said.

In an interview with Caijing Magazine published yesterday, Zhou said it is difficult to promote price reforms when inflation is rising. This is because market-oriented reforms are likely to spur inflation, leading to dissatisfaction among the public, he said.

"The global financial crisis has yet to calm down, so the external environment still requires more observation," Zhou said. "At the same time, the domestic market faces an economic slowdown and inflationary pressure. So the government is waiting for a consensus among officials on the suitable time to act."

But he said that the reform "is a huge systematic change that requires reasonably ordered arrangements."

Andre Meier, a resident representative for the International Monetary Fund, said in Hong Kong yesterday that: "China should move over time to a more market-based financial system. Prices, especially interest rates, should play a bigger role than quantitative restrictions."

Zhou also said borrowing costs will be relaxed first as financial institutions have become capable of market pricing since 1996, when China started to liberalize interbank rates. He voiced his concern that loosening controls on the deposit rate may lead to a speculative inflow of funds that spur inflation.

"Given the interest-rate gap with other countries, the controls on deposit rates can't be relaxed quickly in order to prevent hot money (flowing in)," Zhou said.

Source:shanghaidaily