China is exploring the creation of a mechanism that would use a band to guide the country's interest rates, an approach aimed at giving the market a greater say in the financial system, a senior monetary official said on Sunday.

Yi Gang, vice-governor of the People's Bank of China, said at a news conference that the mechanism being looked at is an interest rate corridor that would be formed through the central bank's deposit and lending facilities to commercial banks.

"China needs to improve the interest rate system to enhance the guidance of the market rates and the effectiveness of monetary policy," said Yi, who is also a member of the Chinese People's Political Consultative Conference National Committee. He made the remarks on the sidelines of the ongoing meetings of the country's political advisers and lawmakers.

Yi said the PBOC would continue to use open-market operations as well as lending and deposit facilities with commercial banks to guide short-term interest rates.

The exploration of adopting an interest-rate corridor underscored China's (FXI, quote) efforts to further liberalize interest rates and support the slowing economy though more effective monetary policy.

In the past, the monetary authority managed interest rates by setting up floors and ceilings. China (ASHR, quote) has already scrapped the caps on both loan and deposit interest rates.

But Yi said that China is currently in the initial stages of establishing an interest-rate corridor because the PBOC has to take into account both the qualitative and quantitative targets of its monetary policy.

Regarding the value of the renminbi, Yi said that the Chinese currency will remain stable against a basket of currencies and there is no basis for continued depreciation.

Separately on Sunday, PBOC Governor Zhou Xiaochuan said China's monetary policy will support the country's ongoing supply-side reform with a focus on the reduction of industrial overcapacity.

"Monetary policy is mainly to manage aggregate demand. If it is done appropriately, it will give more room for supply-side policies," Zhou told reporters while attending the meeting of the National People's Congress, the country's top legislature.

"China has adopted targeted monetary policy and encouraged different financial structures, which can better serve the reform policies to address the issues of overcapacity reduction, deleveraging and inventory destocking," he said.

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