China should take more action to promote steady and unwavering marketization of the current rigid interest rate regime, a practice that is widely adopted in developed economies such as the United States and Japan.

Due to the influence of a complicated series of political and economic factors, no substantial progress has been achieved in this aspect during the period of the 11th Five-Year Plan (2006-2010). However, messages transmitted from a recent top Communist Party of China (CPC) conference indicate that the pace of rate marketization is expected to accelerate in the coming years.

At the CPC Central Committee conference, held in October aimed at mapping out guidelines for the 12th Five-Year Plan (2011-2015) for national economic and social development, the authorities vowed to steadily push forward marketized reforms of the country's interest rates.

The practice of setting the ceiling and bottom interest rates for deposits and loans - to prevent any possible vicious competition among commercial banks for market share - has often meant the country's interest rate level has failed to reflect the real conditions of funds supply and demand. It also serves as the main reason why the country's monetary tools have sometimes failed to produce the expected policy results. More importantly, the ceiling interest rate for deposits has directly resulted in a negative interest rate for big depositors in the context of the ever-rising inflation rate.

In the absence of other viable investment channels, a negative interest rate will inevitably cause a large volume of idle funds to swarm into the stock and real estate markets, aggravating bubbles in these two speculation-prone sectors. As the result of such a negative deposit interest rate, excess liquidity will also choose to withdraw from the banking system to the capital and commodity markets, adding to inflation pressures.

Given that China is a banking-dominated financial system, the lack of a marketized interest rate regime is equivalent to encouraging commercial banks to seek more profits merely by embracing a deposit-lending rate gap. This will undercut these banks' motivation to improve their ability to ward off financial risks and sharpen their competitiveness.