January 16, 2014 12:00 am JST

Seeing double

MASAHIRO OKOSHI, Nikkei staff writer

BEIJING -- The Chinese leadership under President Xi Jinping is nothing if not ambitious. It aims to double the country's gross domestic product and people's incomes from their 2010 levels by 2020.

    This is a tall order, and stable, sustainable economic growth will be key to pulling it off. To make the economy more efficient, Xi and Co. plan to implement market-oriented reforms, the core of which will be moves to ease restrictions on interest rates and the exchange system for the yuan.

"Year one for reforms" 

"We will seize this opportunity to carry out more financial reforms," said People's Bank of China Gov. Zhou Xiaochuan, who is calling 2014 "year one for reforms."

     Chinese authorities have strictly controlled interest rates and foreign exchange activity, preventing free conversion between the yuan and foreign currencies. These restrictions have distorted the flow of money, which has contributed to pushing up regional debt and expanding financing outside regular bank loans. Such funding in the "shadow banking" market constitutes a risk that threatens sustainable and stable growth.

     The central bank is expected to kick off the reforms by widening the yuan's trading band. At present, the Chinese currency is allowed to move 1% above or below the parity rate the bank sets every day against the dollar. The range was expanded from 0.5% to 1% in April 2012. The central bank's Zhou aims to widen the band further, saying he wants the equilibrium exchange rate to be decided through supply and demand on the market so that the central bank does not have to intervene as much.

     The pace of interest-rate liberalization is likely to pick up. China abolished the lower limit on interest rates for bank loans in July 2013. The next focus of attention will be scrapping the upper limit on bank deposit interest rates. Authorities will continue to regulate rates for the time being, but as they lay the groundwork for liberalizing deposit rates, they plan to create a deposit insurance system to prepare for possible bankruptcies among lenders.

     Moves to open up the market are also expected. Financial regulators will probably significantly expand the quota for the Qualified Foreign Institutional Investor program, which permits licensed overseas investors to trade yuan-denominated securities. Also to be expanded will be the quota for the Qualified Domestic Institutional Investor program, which allows domestic investors to make investments overseas. Authorities are eyeing the possibility of scrapping the quotas in the future.

     Premier Li Keqiang is overseeing economic reforms through a mix of policies dubbed "Likonomics." China's money supply has been growing at a faster pace than the government-set target. Li has warned of possible inflation because the ratio of M2 to GDP is over 200%. M2 is a measure of the money supply that includes cash, checking and saving accounts. Moving ahead with reforms without economic stability is something the government wants to avoid. That is why Li said he will neither ease nor tighten monetary policy. The leadership faces the difficult task of keeping an eye on growth and inflation while carrying out reforms in its second year.