CDs give banks room to price interest rates
Print Edition
CHINA’S central bank yesterday issued a provisional regulation that allows financial institutions to issue certificates of deposit (CD), giving banks more freedom over pricing interest rates.
A CD is a time deposit that entitles the holder to receive interest at a higher rate than ordinary deposits, and therefore more appealing to savers.
From yesterday, individual investors can buy CD worth at least 300,000 yuan (US$48,400), and institutional investors at least 10 million yuan.
Interest on the CD will be mainly determined by the market. Banks and investors can set a fixed or a floating rate, using the Shanghai Interbank Offered Rate (Shibor) as a benchmark.
Shibor, which measures costs of interbank borrowing, stood at 3.189 percent for six-month loans and 3.4175 percent for one-year loans yesterday.
The current interest rates for six-month and one-year ordinary deposits can’t exceed 3.075 percent and 3.375 percent, respectively.
A CD is tradable and can be mortgaged for loans.
“The certificates mean a new deposit-soliciting channel for banks and a safe investment for savers,” said Zong Liang, a senior researcher with the Bank of China.
Chinese banks are experiencing a difficult time as many wealth-management programs and a bullish stock market with much higher return rates are draining huge sums of deposits away from them.
“Certificate issuance will be a fast way to attract deposits,” said Zeng Gang, from the Chinese Academy of Social Sciences. Banks can win back some money this way, he added.
However, Wen Bin, chief researcher with China Minsheng Bank, said the CDs could also be a test for banks.
“Higher deposit interest rates can narrow profit margins. Banks have to learn some new tricks to maintain profitability,” said Wen.
In order to control interest rates, China sets a benchmark for financial institutions and allows them to price deposits within a narrow band.
China is now trying to free up its grip on interest rates.
In May, the central bank lifted the upper limit of the deposit rates floating band to 1.5 times the benchmark from the previous 1.3 times, granting banks more pricing autonomy.
Deposit insurance was introduced last month, reimbursing savers if their banks suffer insolvency or bankruptcy. It is widely seen as another key step in this direction.
“Certificates of deposit will give financial institutions even more pricing freedom, thus, pushing the liberalization of interest rates,” the People’s Bank of China said.
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