China Takes Next Step to Free Up Rates With Deposit Certificates

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In the latest move to free up interest rates, China’s central bank will allow lenders to issue certificates of deposits to individuals and companies.

Such certificates, known as CDs, are tradable deposit agreements that give China’s savers more choices and lenders new ways to attract deposits as they compete for funds with shadow-banking firms that issue trust products. The minimum size for individuals will be 300,000 yuan ($48,400) and 10 million yuan for corporates, according to the rules published by the People’s Bank of China Tuesday.

Interest rates of CDs can be fixed or floating, and some of the CDs can be bought or sold back to the issuer or to third parties. China is freeing up interest rates to make them more reflective of market forces and to ease the financial repression that has seen savers subsidize debt-fueled investment. The PBOC has this year raised the cap on what banks can pay depositors and introduced a deposit insurance fund.

“The ongoing move toward interest rate liberalization reinforces our belief that the PBOC will keep market interest rates low, as we think the central bank looks to reduce risks of a sharp tightening in banks’ funding cost,” Goldman Sachs Group Inc. economists wrote in a note. “We now think it is quite probable that the interest rate liberalization process will be completed before the end of this year.”

Such reforms may bolster China’s push to have the yuan included in the International Monetary Fund’s Special Drawing Rights basket when a review is completed this year, the economists wrote. SDR status means the yuan would join the U.S. dollar, euro, yen and British pound as an official reserve currency, furthering the currency’s internationalization.

Next on the to-do list: The PBOC must choose a policy target rate to anchor short-term interest rates and to generate a market-driven yield curve, Australia & New Zealand Banking Group Ltd. economists including Liu Li-Gang wrote in a note.

“This policy target rate will be used as the basis for banks to set reference rates, which then will be used to price financial derivatives and products,” they wrote.

— With assistance by Xin Zhou

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