China to Allow Interbank Trading of Certificates of Deposit

China said it will allow trading of certificates of deposit between banks, another step toward loosening state control over interest rates.

Trading will be permitted in the “near term” as the central bank aims to “create conditions for steady and orderly promotion of deposit-rate liberalization,” Hu Xiaolian, a People’s Bank of China deputy governor, said in a Sept. 24 comment in Beijing posted today on the authority’s website.

The action would build on July’s removal of the floor on borrowing costs, with the PBOC saying at the time that deposit-rate reform was the “the most critical and risky” element of banking reforms. Forcing lenders to compete for funds would offer consumers more spending power, while undermining the model of state-directed, subsidized credit.

“It’s a necessary step to continue to liberalize the interest-rate regime,” said Becky Liu, senior rate strategist at Standard Chartered Plc in Hong Kong. “The first step is to introduce substitute products to onshore deposits.”

In May, China signaled it will propose plans this year to allow freer flows of its currency in and out of the nation as part of measures to loosen control over the yuan and borrowing costs, which the World Bank and the International Monetary Fund have said is a priority in financial reforms.

Bond Futures

China allowed trading in bond futures on Sept. 6 for the first time since a 1995 scandal pushed the nation’s biggest brokerage to the brink of bankruptcy. Policy makers have also expanded programs to allow more foreign institutional investors in domestic capital markets.

The State Council has approved a free-trade zone in Shanghai, scheduled to open this month. A draft plan seen by Bloomberg News shows the zone may liberalize 19 industries from banking to shipping and allow freer convertibility of the yuan.

The nation would probably allow onshore trading of large-denomination, negotiable certificates sold by big banks by year-end, Linan Liu, a Hong Kong-based strategist at Deutsche Bank AG, wrote in a Sept. 16 research note.

Certificates of deposit will provide flexibility for banks to manage cash because the securities, unlike interbank loans, are tradable, Hong Kong-based Liu Li-gang and Shanghai-based Hao Zhou, economists at Australia & New Zealand Banking Corp., wrote in a note to clients today after Hu’s comments.

China also needs to find a new rate as a benchmark for its monetary-policy stance, Liu wrote, adding either the Shanghai interbank offering rates or bond repurchase rates are “the potential candidate.”

Premier Li Keqiang said this month the nation will start deposit insurance at a right time.

“The PBOC should probably consider a cap on the rates for the negotiable CDs as there’s a risk of price war,” said Hu Yifan, Hong Kong-based chief economist at Haitong International Securities Co. “A deposit insurance system should also be introduced as soon as possible to make sure risks come under control.”

To contact Bloomberg News staff for this story: Fion Li in Hong Kong at fli59@bloomberg.net; Justina Lee in Hong Kong at jlee1489@bloomberg.net; Li Liu in Beijing at lliu255@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net; James Regan at jregan19@bloomberg.net

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