China Takes Critical First Step To Liberalize Interest Rates

China’s long-awaited liberalization of its interest rates is a big deal. Initially it is a bigger deal symbolically than in reality; only the floor on the rates that banks charge for loans is being scrapped in this first move; the People’s Bank of China says it will proceed slowly with what it calls such a risky undertaking and the cap on deposit rates remains for now. A small portion of all loans will be affected immediately (only 11% of existing loans were made at a discount to the benchmark rate). But its importance lies in the fact that the first step has at last been taken in a critical leg of financial markets reform. It puts China firmly on the path to a fully convertible currency and floating exchange rates.

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