The time is right for China to bind interest rates to market forces, said an article in China Business Times. Excerpts follow:

Price levels have been steadily declining in recent years and the economy has been beset by continual deflation.

Deflation lessens the risk of market-linking interest rates, as the State needs not worry that reforming the system will induce inflation.

The smooth progress the reform of the State-owned enterprises (SOEs) has made means they are more capable of sustaining the impact of a change in the interest rate system. Moreover, market-led interest rates will accelerate the restructuring of the SOEs.

To prevent the risks incurred by bad loans, commercial banks are becoming more and more cautious in granting loans. Therefore, it is likely they will not engage in vicious competition, willfully raising the interest rate to attract customers.

The stable balance between monetary supply and demand in the domestic market has created ideal conditions for loosening control of the interest rate. And since the current interest rate is the lowest it's been in the last 20 years, its deregulation will not dangerously inflate rates.

Actually the interest rate system has already been partially marketized. For example, in the issuing of treasury bonds conducted through public bidding, the interest rate is decided by the bidding price. And the floating margin allowed for small and medium-sized business loans is larger now.

These market conditions show that the time has come for China to develop its interest rate system further.

In pushing ahead with the market-linking process, the State should strengthen the role of the currency market so as to truly reflect the capital demand-supply relationship of the market, and lay down a solid foundation for the new interest rate system. Currently the currency market is immature. Its small size and limited influence have often distorted currency prices.

The central bank should give commercial banks more independence in deciding the rate according to market requirements.