Shanghai’s liberalisation of interest rates on foreign currency deposits a bold surprise

In a bold move, the PBoC has today extended a pilot program on foreign currency deposit rates from Shanghai's Free Trade Zone (FTZ) to the whole of Shanghai.

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With Shanghai on track to become a global financial centre by 2030, this indicates China's determination to quicken financial reform that supports economic growth. This is an important experiment for China's interest rate liberalisation as it extends across “the wall” of the FTZ and involves the domestic banking system.

Under the new plan, Shanghai will first liberalise interest rates on small-sum foreign currency deposits from companies and then expand to those from individuals.

The cap on RMB deposit rate remains, however, suggesting China may soon start experimenting with further financial liberalisation for RMB deposits in the FTZ or banks’ Free Trade Accounts.

The initial pilot started in the FTZ just three months ago when the PBoC removed the cap on deposit rates on foreign currency accounts holding below $US3 million. Deposit rates on foreign currency accounts holding more than $US3 million have been liberalised throughout China since 2000. ANZ believes if the extended pilot program is successful, China will likely roll out liberalisation on foreign currency deposits across the whole country. China's foreign currency deposits totalled $US566 billion in May, representing about 3 per cent of total deposits.

We believe the PBoC will watch the market flows closely and keep a tight rein as a partial liberalisation may still distort the market pricing of RMB and foreign currencies in the money and FX market and arbitrage opportunities may exist.

This is an edited excerpt from ‘Shanghai liberalises interest rates on foreign currency’, ANZ Research, Quick Reaction - available on ANZ Live.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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