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September 1, 2017

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Long-term CD issues banned

CHINA’S central bank said yesterday that financial institutions will be banned from issuing certificates of deposit with terms exceeding one year, as the country seeks to channel more money to support the real economy.

From today, terms of newly issued CDs should be less than one year, according to a statement from the People’s Bank of China.

CDs are tradable deposit agreements that allow the market to play a central role in deciding the interest rates of financial products.

Interest on the certificates will be primarily 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.

China started to allow banks to issue large-scale CDs in June 2015, in a step toward interest rate liberalization, which was basically completed in October 2015 with the removal of the deposit rate upper limit.

The latest requirement on CD terms will help prevent financial resources from circulating in the interbank market for too long to enable the money to flow into the real economy, said Sun Guofeng, head of the PBOC financial research institute, in an interview with China Financial News, a news outlet under the central bank.

But given the relatively small scale of long-term CDs, the new policy would have a limited impact on the market, Sun said.


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