China Took Another Important Step Towards Liberalizing Interest Rates This Weekend
Reuters
These certificates of deposit "can help banks secure a more stable funding source and offer liquid and safer underlying securities for investment products targeting individual investors," writes Societe Generale's Wei Yao.
Individuals, governments, and non-financial companies can't jump into this market just yet, but they can tap into it through funds and finance companies, says Bank of America's Ting Lu.
While this move was anticipated, it signals an important step in interest rate liberalization. China has yet to scrap its ceiling on deposit rates, which experts argue is the most important and challenging step in the process to true interest rate liberalization. We've previously explained why it's so difficult to liberalize deposit rates.
Yao expects Beijing to scrap the ceiling on long-date deposits, implement a deposit insurance scheme, and pass a bankruptcy law for financial institutions in the near term.
Here are the key guidelines to the certificates of deposit from Yao:
- Issuers are depository financial institutions, including policy banks, commercial banks, rural credit cooperatives, and a few others.
- CDs cannot be less than 50 million yuan ($8.2 million) per issuance and issuers must report to the central bank in advance of the total amount they plan to issue in a year.
- CDs are to be invested and traded by interbank market participants, fund management firms and fund products.
- CDs can be used as collateral for repurchase agreements in the interbank market.
- CDs issued with fixed rates must be no longer than one year in duration, and must use the Shanghai interbank offered rate (SHIBOR) as the benchmark. Those with floating rates should be longer than one year in duration.
Banks can begin issuing CDs starting Monday.
- In second consecutive week of decline, forex kitty drops $2.28 bn to $640.33 bn
- SBI Life Q4 profit rises 4% to ₹811 crore
- IMD predicts severe heatwave conditions over East, South Peninsular India for next five days
- COVID lockdown-related school disruptions will continue to worsen students’ exam results into the 2030s: study
- India legend Yuvraj Singh named ICC Men's T20 World Cup 2024 ambassador