The path of financial reform in China is becoming ever more tortuous. Bankers gathered at a Singapore summit last weekend say the next step on the path is interest rate deregulation, which could come in the next 18 months, bringing in its wake myriad headaches both for the banks and for many of their customers.
It is a logical next step. By deregulating rates, Beijing hopes to stem the growth of the shadow banking system. That growth has been largely driven by the desire of those with excess cash to earn more interesting amounts on their savings, while borrowers who cannot get loans at the artificially low rates at the banks hope to attract funds by paying more for them unofficially.
Deregulating rates is also a necessary precondition for removing controls on capital flows. As long as the price of money is kept artificially low, and investment outlets scarce on the mainland, the moment funds are allowed to leave China they will do so in search of higher returns offshore.