The Wall Street Journal reports, "the Chinese central bank's new chief economist is pushing a plan to liberalize the country's financial system within three years, according to economists briefed on the plan, as the country looks for reforms to sustain growth".
Ma Jun, until recently Deutsche Bank AG 's top China economist, presented a proposal for remaking China's monetary policy at a closed-door economic-policy session held by the People's Bank of China and the International Monetary Fund on March 27 in Beijing. Mr. Ma was still at Deutsche Bank then, but his talk was followed closely because he was expected shortly to join the PBOC as its first chief economist.
Mr. Ma said China should liberalize in steps, according to participants at the IMF-PBOC meeting. First it needs to establish a central bank-blessed interest rate that would set a benchmark for lenders. China's interbank rate—the rate that banks lend to one another—could serve that purpose.
During a first stage of reform, Mr. Ma said, according to participants, the PBOC should keep its intentions about the interbank market quiet and target a broader measure of money supply, known as M3. If the interbank lending system stabilized, China could shift fully to a monetary policy based on interest rates within three years, he said, according to those present.
In the end, the PBOC would set the interbank market rate, and banks would be free to charge what they like for deposits and loans.
The IMF has urged the PBOC to act carefully as it liberalizes interest rates and to put in place a bank deposit insurance system and improved regulation, among other measures. In other countries where banks have been freed from government fiat to set bank deposit rates according to competition, some have gone on lending sprees that have ended badly.
