China moves closer to freeing interest rate

New regulations out of China’s central bank appear to be one of the final steps to a full floating interest rate.

China’s central bank issued a regulation on Tuesday that allows financial institutions to sell large-denomination certificates of deposit, known as CDs, to individuals and companies, reported Xinhua. Analysts said this was a big move towards the full liberalization of interest rates.

The CDs are tradable agreements that allow lenders to bypass the interest rate controls. Banks and investors will be able to agree upon a fixed or a floating rate, using the Shanghai Interbank Offered Rate (Shibor) as a benchmark. The current ceiling on deposit rates is 1.5 times the benchmark.

Shibor, which measures the costs of interbank borrowing not under state control, stood at 3% for six-month loans and 3.4080% for one-year loans on Wednesday. The current interest rates for six-month and one-year ordinary deposits cannot exceed 3.075% and 3.375%, respectively.

“The introduction of the CDs is a milestone in pushing China’s interest rate reform through the last mile,” Deng Haiqing, an analyst with CITIC Securities, told Xinhua.

The participation threshold for purchasing a CD for individual investors is 300,000 yuan ($48,860) to 10 million yuan for institutions, according to the central bank.

“With higher returns and less risks due to the deposit insurance system already in place, the CD scheme is expected to offer banks new channels to lure deposits at a time when they are under vehement attack from other wealth management products and a booming stock market, said Xinhua.

At the end of April, outstanding yuan deposits stood at 125.76 trillion yuan, according to central bank data. It was up 9.7%, but  growth had slowed 4.6 percentage points from a year earlier.



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