CHINA said yesterday that it will scrap a ceiling on interest rates paid on some foreign currency deposits in Shanghai’s free trade zone, taking a small step toward market-based interest rates.

    The new policy, effective March 1, will apply only to residents working in the free trade zone for more than one year, the Shanghai branch of the People’s Bank of China, the central bank, said in a statement on its website.

    The relaxation in rules affects small deposits at banks in the zone, the central bank’s Shanghai arm said.

    China currently has limits on interest rates on foreign currency deposits of less than US$3 million. The interest rate cap on U.S. dollar deposits was 3 percent for one-year fixed deposits.

    “It is a key step, whose success will pave the way for more interest rate liberalization in the zone,” Zhang Xin, head of the central bank’s Shanghai branch, said at a press conference yesterday. “Banks need to set up risk management systems to prevent significant outflows of foreign exchange deposits and severe volatility in interest rates on the deposits.”

    The policy will be eventually expanded nationwide, sources familiar with the matter said.

    The impact of the move is likely to be limited as the zone covers just 29 square kilometers. China opened the zone in late September, saying it was a landmark for economic reforms.

    Interest rates on yuan deposits throughout the country will still be controlled by the central bank.

    China scraped all controls on lending interest rates in July. In December, it allowed banks to issue negotiable certificates of deposit that aren’t subject to interest rate curbs. (SD-Agencies)