zhou xiaochuan : steadily advancing market - based interest rate reform speech by mr zhou xiaochuan, governor of the people ’ s bank of china, at the conference “ china : making financial markets work ”, jointly sponsored by the bank of china, euromoney and hong kong & shanghai banking cooperation, beijing, 3 december 2003. * * * it ’ s my honor to attend euromoney ’ s conference in china. first, i would like to express my thanks to the sponsors of this conference including bank of china, euromoney group and hong kong & shanghai banking corporation. my thanks also go to the other parties that have provided support to the conference. the theme of the conference is “ making financial markets work ”, a very important topic. in china, one of the major means to promote the efficient operation of financial markets is to steadily advance market - based interest rate reform and to gradually establish benchmark yield curve. i. progress achieved in china ’ s market - based interest rate reform and problems remained the chinese communist party and government attach great importance to the market - based interest rate reform. in 1993, the 3rd plenum of the 14th cpc national congress pointed out that “ the central bank shall promptly adjust benchmark interest rate according to changes in market supply and demand, and allow the commercial banks to flexibly set their own rate on loans and deposits within a specified range. ” the 5th plenum of the 15th cpc national congress in 2000 and the 4th plenum of the 9th national people ’ s congress in 2001 called for “ steady progress in market - based interest rate reform ”. in 2002, the 16th cpc national congress adopted in its report the decision to “ steadily advance market - based interest rate reform and optimize the allocation of financial resources ”. the decision on issues concerning improving the socialist market economic system adopted by the 3rd plenum of the 16th cpc national congress further pointed out that “ market - based interest rate reform should be steadily advanced to establish and improve the mechanism for determining interest rate based on market supply and demand. the central bank shall use monetary instruments to influence market interest rate. ” while moving in the general direction of market - based interest rate reform, we need to clarify some concepts. some people think that the objective of market - based interest rate reform is to let all interest rates determined by the market. this perception is incorrect. the interest rates that will be determined by the market include commercial rates but not the interest rates used by

the rural credit cooperatives in selected areas may set their lending rate within 90 - 200 percent of the central bank ’ s benchmark rate. other rural credit cooperatives may set their lending rate within 90 - 150 percent of the benchmark rate. for the commercial banks, the interest rate they charge on loans to the small and medium - sized enterprises shall be within 90 - 130 percent of the benchmark rate ; that to the large enterprises shall be within 90 - 110 percent of the benchmark rate ; and that to a few key enterprises may not exceed the benchmark rate. the current situation of supply and demand in the credit market and the risk management requirement of the commercial banks call for changes in the above policies. such policies have also made it difficult for the small and medium - sized enterprises to obtain bank loans in the absence of guarantee or collaterals. in the next - stage reform, the floating band on lending rate will be further widened. in particular, the range above the benchmark rate will be further expanded to give the banks greater flexibility in managing their lending rate. as to the range below the benchmark rate, i have mentioned earlier that the lending rate can be as low as 90 percent of the benchmark rate. of course, some enterprises with very good credit standing will be able to get even lower rate. nevertheless, they are encouraged to issue corporate bond, which will help promote the development of corporate bond market. the interest rate in corporate bond market shall be allowed to move in a wider range. we should let the market determine whether an enterprise can borrow at a lower rate. second, the interest rate on deposits shall be allowed to move downward against the benchmark rate. the practice of allowing a few rural credit cooperatives to set the deposit rate above the benchmark rate has its special background, and has raised some controversies. in china, the 8 % capital adequacy requirement set by the basle committee on banking supervision in its 1998 capital accord has not been strictly enforced in the regulation of financial institutions, and the prompt corrective actions have not been adequately established. some financial institutions with poor performance and inadequate capital and liquidity tend to attract deposits by offering high interest rate. the riskier a financial institution is, the more likely it is to offer high interest rate, resulting in deteriorating financial positions of these institutions. therefore, in the absence of strict enforcement of capital adequacy requirement and effective implementation of the prompt corrective actions, we should be cautious in allowing