SHANGHAI - China's central bank removed the cap on interest rates for foreign currency deposits in Shanghai banks on Friday, expanding a pilot from the Shanghai free trade zone (FTZ).

A statement by the Shanghai office of the People's Bank of China said interest on corporate foreign currency deposits of less than $3 million will no longer be subject to a ceiling.

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This is the first reform piloted in Shanghai FTZ to be expanded outside the zone.

Though banks are now allowed to negotiate a rate with clients, regulators fear a scramble for funds by raising the rate too much and have brought together 15 banks into a committee to ensure rates are in line with market demand and do not vary dramatically between banks. Authorities hope the committee will infuse some discipline into banks and avoid interest rate volatility.

According to Pan Yuehan, head of the Shanghai branch of Bank of China, and current presiding over the committee, the deposit rate has remained stable since the cap was removed in the FTZ in March. The difference in the deposit rates offered by banks has been within 10 basis points.

Inclusion of foreign banks such as HSBC on the committee suggests that authorities value foreign bank's pricing sophistication.

The central bank intends to use the foreign deposit rate pilot to gain experience for liberalizing the rate for yuan deposits.

China removed the floor for yuan loans in July last year and asked nine Chinese banks to quote the rate they offer to their best clients in an attempt to form a reference rate to replace the benchmark rate dictated by the central bank.