Most commercial banks in Shanghai have lowered the interest rates they pay on Hong Kong dollar-denominated deposits, after the government recently allowed banks to set their own rates.

The bank of China's Shanghai Branch, the largest foreign exchange lender in the city, cut the benchmark one-year interest rate on Hong Kong dollar deposits to 0.5 percent recently, compared with the People's Bank of China's guiding rate of 0.8125 percent.

China's three other big-four state-owned commercial banks - the Industrial and Commercial Bank of China, the Agricultural Bank of China and China Construction Bank - have also cut rates on Hong Kong dollar deposits at different levels.

"We issued a circular to domestic commercial banks last month allowing them to adjust interest rates on forex-denominated deposits since November 20," said an official with the central bank.

The PBOC said in the circular that domestic commercial banks can lower the interest rates on Hong Kong dollars, Japanese yen, the euro and US dollars for accounts containing less than US$3 million.

"But no higher interest rates on the four currencies can be offered," said the central bank official.

Previously, interest rates for foreign currency deposits in domestic banks were set equivalent to the central bank's guiding rates.

To date, local banks have not changed rates paid on the other three currencies.

"We cut the interest rate for Hong Kong dollars as the currency's interbank funding rates in Hong Kong have continued to drop since July," said Yu Yi, an analyst with the Agricultural Bank's Shanghai Branch. "The falling rates for Hong Kong dollars in the interbank market urged us to lower the currency's deposit interest rates to guarantee our returns."

The Hong Kong dollar's one-month interest rate was 0.06473 percent in the Hong Kong interbank funding market on November 20, compared with 1.22321 percent on July 22.

The central bank said the new rule is one more step in its plans to speed up the liberalization of its interest rate regime and gives domestic banks more time to obtain experience in pricing their products according to market conditions before the banking sector is fully opened to foreign rivals at the end of 2006.

China has already allowed domestic banks to float interest rates on lendings extended to small and medium-sized businesses and some rural cooperatives on the mainland have been permitted to offer flexible interest rates on renminbi deposits.

Zhou Xiaochuan, governor of the Chinese central bank, said at a forum earlier this month that he has seen a growing desire among domestic commercial banks to get more leeway in lowering interest rates to control the size of their liabilities.

(Shanghai Daily December 9, 2003)