China CDs Show Banks May Benefit From Rate Reform, Mizuho Says

Chinese banks’ ability to raise funds below benchmark interbank costs by selling negotiable certificates of deposit shows they may benefit from interest-rate liberalization, according to Mizuho Securities Asia Ltd.

When 10 banks sold 34 billion yuan ($5.6 billion) of the certificates last week, they paid less than the Shanghai interbank offered rate, easing concern that the industry could face a funding shortage, Jim Antos, a Hong Kong-based Mizuho analyst, wrote in a note today. Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, sold CDs at 5.1 percent on Dec. 12, compared with the one-month Shibor of 5.42 percent, data compiled by Bloomberg show.

The yields are the first indication of investors’ willingness to fund lenders after the central bank approved the new securities on Dec. 8, as part of the process of freeing borrowing costs. A floor on lending rates was removed in July and the Communist Party pledged last month to give markets a “decisive” role in the world’s second-largest economy.

“The view that interest-rate liberalization will be automatically negative for net interest margins is probably flawed,” Antos wrote. “This innovation will make it easier and potentially cheaper for banks to manage their liquidity positions.”

Borrowing costs for the largest lenders could decline once corporate and individual investors enter the market, which is now limited to banks, Antos wrote.

To contact Bloomberg News staff for this story: Nathaniel Espino in Beijing at nespino@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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