Zhou Xiaochuan, the governor of the People's Bank of China, addresses the 2009 Business Week CEO Form that lasts from Nov 19 to Nov 20, 2009, in Beijing. [Photo: sina.com.cn]

Low interest rates, especially the deposit rate, would discourage financial institutions from providing adequate financing to the real economy, Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said Friday.

He told the 2009 Business Week CEO Forum in Beijing that low interest rates would reduce pressure on financial institutions, removing incentives to actively provide financial services to the real economy.

The forum, which would close on Saturday, is also attended by U.S. Ambassador to China Jon Huntsman and Nobel Economics Prize laureate Robert A. Mundell.

"China has set the interest rate at about 2 percent to press Chinese financial institutions to lend money to real economy for gains and reduce cash stockpiles," Zhou said.

Zhou was referring to the low-interest policies of some countries and regions to fight the lingering economic downturn, said Tan Yaling, an expert with the China Institute for Financial Derivatives at Peking University.

U.S. Federal Reserve chairman Ben S. Bernanke said last week that U.S. interest rates had remained very low for an extended period and would likely stay that way for some time.

He reaffirmed the Federal Reserve's stance of keeping rates low for an "extended period" to sustain economic growth.

The Federal Reserve has kept its benchmark rate near zero since last December to spur an economic rebound and combat the worst financial crisis since the 1930s.

The central banks of Europe and Japan also said that they would keep their key interest rates at 1 percent and 0.1 percent, respectively.

China's monetary policy should be in line with its long-term economic strategy and focus on the domestic development, said Tan.

The one-year benchmark deposit rate stands at 2.25 percent among Chinese banks. The rate has been unchanged since December last year when China's central bank cut loan and deposit rates by 0.27 percentage points.

In efforts to stimulate the economy following the global financial crisis, China's central bank cut the interest rates five times in four months from September to December last year.

Lian Ping, chief economist of the Bank of Communications, China's fifth largest lender, said lowering rates could bring the risk of speculation, as China's loose monetary policy and positive fiscal policy had led to a credit boom this year.

According to the PBOC, a total of 8.92 trillion yuan (1.3 trillion U.S.dollars) in new loans were pumped into the economy in the first 10 months based on a moderately loose monetary policy, far exceeding the government's target of 5 trillion yuan for the entire year.

The PBOC gave no specific figure on how much money has flowed into the real economy this year, but economists and institutions have repeatedly warned of bubbles in the stock market and the real estate sector.

Cheng Siwei, a Chinese economist, said last month that in the first quarter alone an estimated 2.1 trillion yuan of credit had been diverted from the real economy.

In the first quarter, Chinese banks had lent 4.58 trillion yuan, but total investment in the same period stood at 2.88 trillion yuan, which included 400 billion yuan from government-sponsored investment, said Cheng.

That was a difference of 2.1 trillion yuan, which he said had flowed into the property and equity markets and created partial prosperity in the two sectors.

In May, the PBOC asked Chinese bankers to ensure soaring credit went into the real economy.

"We cannot say that Zhou is implying an interest rate rise, but personally I see an upward trend in interest rates based on the country's economic performance," Lian told Xinhua.

In his speech, Zhou had also warned that although China's domestic demand had been driven up by rising liquidity, China should be "careful" with its accelerating investment, as some sectors already had overcapacity, especially in traditional manufacturing industries.

"More fields should be explored for future investment and economic growth," he said.