THE State Council, China's Cabinet, has reportedly approved a reform program drafted by the central bank, proposing to scrap the five-year deposit benchmark rate and introduce a new lending rate quoting mechanism.

The move comes after the central bank scrapped the lower limit on bank lending rates on July 19 in a big step toward liberalizing interest rates.

The People's Bank of China (PBOC) plans to reduce the categories for benchmark deposit rates from the current seven to six by removing the five-year benchmark rate, which will allow banks to determine the five-year rate by themselves.

Meanwhile, the lending rate brackets will also be cut from the current five to three, Caijing Magazine reported without giving a timetable for the measures.

Five-year fixed deposits account for less than 0.3 percent of total deposits at most banks, according to the report.

The central bank also plans to introduce a rate quoting mechanism for loans, which is similar to the mechanism governing the Shanghai Interbank Offered Rate (SHIBOR) system.

Banks will quote the rates offered to their best quality clients, which will be calculated and published as an average by the China Foreign Exchange Trade System (CFETS).

The CFETS is a sub-institution of the PBOC that provides trading, information, benchmark and training facilities to the interbank lending, bond and foreign exchange markets.

China needs a new loan-pricing mechanism due to the gradual phasing out of the PBOC benchmark lending rates, Standard Chartered Bank said in a report last week.

However, the reported new pricing mechanism is different from what analysts had expected. The British lender said most new loans will maintain the current pricing mechanism in the immediate future, while a gradual shift towards new base rates, such as the SHIBOR or China Government Bond yields, is likely.

The central bank announced earlier this month that it will scrap the floor of lending rates, except for residential mortgages, to give commercial banks the freedom to adopt differentiated pricing for loans.