China to Push Forward Interest Rate Liberalization

By Dezan Shira & Associates

Posted: 17th December 2013 08:47

The People’s Bank of China (PBOC), China’s central banking authority, promulgated the “Interim Measures on Administrating Interbank Certificates of Deposit (PBOC Announcement [2013] No.20, hereinafter refered to as ‘Interim Measures’)” over the weekend as a guideline for financial institutions issuing and trading certificates of deposit (CDs) in the interbank market, which entered into effect immediately on December 9, 2013. Detailed information can be found below.
 
CDs, also known as time deposit, are financial products that can be issued by policy banks, commercial banks, rural credit cooperatives and other thrift institutions with PBOC approval, according to the Interim Measures. The promulgation of the Interim Measures gives the green light for the issuance of CDs in the secondary market. It is considered another significant step in China’s interest rate liberalization process and deemed to make interbank deposits more transparent and market based.
 
“This will efficiently move capital from banks with abundant cash reserves to those ones with money shortages, thus improving the liquidity situation of the market,” said Lian Ping, the chief economist of China’s Bank of Communications.
 
In late July, PBOC removed the lending rate floor on domestic banks, which was previously set at 30 percent below the annual lending benchmark rate of the PBOC, in addition to removing controls on bill discount rates and lending rates for rural cooperatives. However, the deposit rate ceiling was not challenged.
 
Individual investors and non-financial enterprises have not yet been allowed to participate in the trade of CDs. According to the PBOC, only fund management companies and financial institutions that have been approved to participate in the interbank lending market can invest in and trade CDs. Publicly offered CDs could be traded freely and used as collateral for repurchase agreements, while privately offered CDs should be limited to the initial investors for circulation.
 
Financial institutions must report to the PBOC in advance the total amount they plan to issue in a year and must also release their yearly plan to the market before their first issuance.The price and terms are set at the issuers’ discretion as long as each issuance is not valued at less than RMB50 million (US$8.2 million).
 
The Interim Measures specify that the market should determine the interest rate and price of issuance. The term for CDs with fixed interest rates can only be 1 month, 3 months, 6 months, 9 months and 1 year (capped at 1 year). The term for floating interest rate CDs should be over 1 year.All interest rates will be benchmarked against the Shanghai Interbank Offered Rate (Shibor).
 
This article was first published on China Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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