The conditions are 'basically ripe' for pushing forward with interest rate liberalization, the governor of China's central bank wrote in an article published Friday, raising hopes that the long-delayed reform could be moving to the forefront of Beijing's agenda.

China must also 'accelerate' the establishment of a deposit insurance system, another key banking reform, People's Bank of China Gov. Zhou Xiaochuan wrote in an issue of China Finance Magazine dated Friday that reached readers on Tuesday.

Economists view a move to market-based interest rates as a key element of China's reform program that would help channel money to households and boost consumption.

But the government has been hesitant to free up interest rates out of concern that it would hurt the profitability of Chinese banks by forcing them to compete for deposits.

Mr. Zhou's article gave no specific timetable for interest rate liberalization, but it argued that the concerns which have held back the reform are dated, with the banks now in a strong financial position.

Mr. Zhou's analysis in the article is consistent with recent comments made by academic economist Li Daokui, who until last week served as an adviser to the central bank. In a speech at a forum over the weekend, Mr. Li called China's state-owned banks 'dinosaurs' that are now big enough to fend for themselves.

'Banks have high profits, and we don't need to worry about protecting them,' Mr. Li said.

Despite this, some analysts and bankers say the competition between banks that would be unleashed by liberalized interest rates could disproportionately hurt smaller banks and even drive some of them out of business.

In a press briefing last week, PBOC Vice Governor Hu Xiaolian said that the establishment of a deposit insurance system is a pre-condition for interest rate liberalization, because it would help keep the banking system on a stable footing despite the intensified competition.

Under the current system of controlled interest rates, savers have spent much of the last decade earning returns on their deposits below the level of inflation.

This means households have been losing money on their deposits, stymieing the government's attempt to kick start domestic consumption as a driver of growth. This 'financial repression' of households is cited by analysts as a main reason why consumption in China remains low.

Interest rate liberalization is also seen as necessary before China can lift capital controls and float its currency. Under a more open system, fixed interest rates that are out of alignment with international rates could trigger sharp inflows and outflows of capital.

In his article, Mr. Zhou argued that China should also open up its financial markets, enhance the two-way flexibility of the yuan, gradually open more channels for capital to flow out of China and push forward with the opening of the capital account. But he gave no specific timetable or sequencing for the various reforms.

-------Provided by Division of Information of Hunan Jiatai Chemical Co.,Ltd