China to launch new vehicle towards freeing interest rates

China will soon introduce negotiable certificates of deposits (NCDs) on the interbank market, announced Pan Gongsheng, vice governor of China's central bank, on Friday.

The issuance of interbank NCDs, an investment vehicle, is considered a stepping stone for market-oriented reforms of deposit interest rates.

Interest rate reforms have entered a crucial stage and the central bank has mapped out an overall program for this, said Pan.

Besides introducing NCDs, the central bank will further expand the floating range of deposit interest rates and ultimately lift controls on deposit rates, he added.

NCDs are issued by banks and can not be cashed in before maturity.

They were first introduced in China by the Bank of Communications in 1986, but the gate was closed after 1997 due to fraud and forgery.

The People's Bank of China, or the central bank, announced on July 19 that it would scrap the floor limit for banks' lending interest rates. Financial institutions can decide their own rates following commercial principles.

But a ceiling limit on deposit rates remained unchanged. The cap is 110 percent of benchmark deposit rates and the benchmark rate for one-year fixed deposits is now 3 percent.