Sheng Songcheng, president of the central bank’s Shenyang branch recently suggested that China should accelerate interest rate marketization and launch floating deposit rate pilot projects in northeastern China.

Xia Bin, a member of the central bank’s Monetary Policy Committee, also pointed out on Aug. 28 in Shanghai that a system of floating deposit rates should be launched at the right time.

Xia did not describe the details of the system. Regarding the implementation of his suggestion, Sheng said that the deposit rates should be widened gradually in order to guarantee the stable and smooth progress of China’s reform and opening-up.

Currently, China’s deposit rates are fixed, not floating. Regarding the disadvantages of fixed deposit rates, Sheng expressed that fixed deposit rates could cause a pretty large rate gap, which is a form of a monopoly. With fixed deposit rates, the banks can obtain profits easily as long as they increase their loans.

“Under this pattern, banks always have a strong desire to expand credit, and most capital is given to the large enterprises and the infrastructure projects of local governments,” said Sheng.

If the deposit and loan interest rates are all controlled by the market, then the profit margins of the banks will be compressed, which will encourage these banks to change their credit operations and credit structure, he said.

A general manager of the credit management department under a joint-stock commercial bank has raised a question on the feasibility of floating deposit rates and said, “If the rates go up, all banks will raise their deposit rates to the ceiling, otherwise a huge number of deposits will be withdrawn.”

Guo Tianyong, director of the China banking Research Center under the Central University of Finance, has also expressed his doubts about the feasibility of the mechanism. He said that it is better to leave the loan interest rates unchanged while raising the deposit rates rather than to introduce the floating mechanism of deposit rates.