The central bank will try to funnel fresh capital into policy banks, which will then offer loans to local governments. (Photo : www.english.cri.cn)
The People's Bank of China has announced in a statement online on June 2, Tuesday, that it will issue large-denomination, floating-rate tradable certificates of deposit (CDs) to individuals and companies, which experts see as a major step toward the liberalization of interest rates, the China Daily reported.
The report said that the CDs, which are deposit agreements by lenders, can be traded in the secondary market, with nine maturities ranging from one month to five years.
The bank said that the floating rates will be based on the Shanghai Interbank Offered Rate. It added that the minimum amount for individuals will be 300,000 yuan ($48,400), while the minimum for companies will be 10 million yuan.
Experts said that the said securities will allow more scope for commercial banks to set rates, adding that the CDs will support the nation's move toward interest rates determined by market and will also cut down on borrowing costs.
The central bank said that the CDs will be covered by the deposit insurance program.
Zhang Xingrong, head of the banking industry research at Bank of China Ltd., said: "Issuing CDs to companies and individuals will drive deposit rate liberalization because banks will set the terms of CDs according to market forces."
Zhang said that the financial instrument will help commercial banks stabilize their deposit sources and improve their liquidity management since banks will be free to decide when to issue CDs, what denominations to issue, and the maturity and interest rates on the said instruments.
Wen Bin, principal researcher at China Minsheng Banking Corp., said that small and medium-sized banks, which are often restricted by loan-to-deposit ratios of as high as 75 percent, will be especially interested in issuing CDs to widen their funding sources.
"It will test the banks' ability to set prices and manage assets," Wen was quoted as saying. "Banks have to pay back principal and interest to CD investors even if losses occur, so the lenders must strike a balance between risks and returns while making sure that they can make a profit with CDs."
Currently, CDs could only be issued and traded among banks.
At least 58 financial institutions have issued 965 CDs totaling 713.8 billion yuan in the interbank market in the first quarter. According to the report, their prices were set using the SHIBOR reference, which measures the cost of interbank lending.
The central bank said that the total CD transactions in the secondary market reached 537.5 billion yuan during the period.
The CDs are also part of the central bank's planned policy package, along with reduction in benchmark interest rates and banks' reserve requirement ratio, to help ease liquidity and strengthen the real economy.
