Volatile Shibor unready as PBOC frees loan rates

China's removal of interest-rate restrictions on most loans increases the urgency of reducing volatility in money-market rates that can serve as new benchmarks to help the central bank manage the economy. While the overnight or seven-day Shanghai Interbank Offered Rate, or Shibor, is a potential new benchmark, its swings during a record cash squeeze show the need for better control by the central bank, JPMorgan Chase & Co said. A measure of 100-day historical volatility for seven-day Shibor jumped to 177 per cent on July 4, compared to 10.6 percent that day for the similar dollar rate.

China's gauge was at 179 per cent in February around the Chinese New Year holiday.

Shifting to a monetary policy based on interbank rates, rather than central planning guidelines, would bring China in line with the U.S. and Japan. The People's Bank of China removed the lending-rate floor while leaving the deposit-rate cap intact, highlighting the tension between boosting consumer spending during an economic slowdown and maintaining profits at state- owned banks.

"It is very important for the PBOC to find a new benchmark," said Yao Wei, China economist at Societe Generale SA in Hong Kong. "Since last year the deposit rate has been the only effective rate for the financial system. That was why the PBOC didn't touch it at this time." The central bank currently sets the one-year lending rate at 6 per cent, with a one-year deposit rate of 3 percent, following reductions in June and July last year.