China expands yuan trading range to 2% and plans to float deposit interest rates in 1 to 2 years

Starting Monday, the yuan will be able to trade as much as 2% on either side of what is known as the parity rate, a daily peg for trading of the yuan against the U.S. dollar that is set by the central bank. The yuan’s trading band was last widened in April 2012, from 0.5% to 1%, and before that from 0.3% in May 2007.

China’s central bank governor said on Tuesday last week that the China’s deposit rates are likely to liberalised in one to two years – the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

The move will let financial markets decide the price of loans, which economists say will go a long way to prevent the wasteful investment funded by artificially cheap credit that has led to a massive buildup in debt.

The central bank is widely expected to introduce a deposit insurance scheme before liberalising deposit rates to protect savers in case a freed-up market leads to major turbulence for smaller banks.

HSBC analysts said they expected the insurance scheme to be introduced “in the coming months”.

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