China trials new interest rate reform

China's new guideline on deposit certificates in the interbank market became effective on Monday, with the latest edition of the Shanghai Securities News hailing this as a major trial in pushing interest rate liberalization.

The paper said the guideline published on Sunday by the People's Bank of China (PBOC) will help increase the range of debt products offered by financial institutions, so as to better prepare for the gradual liberalization of interest rates.

"This trial marks China's only marketized deposit interest rate at present, and it can provide references for future deposit interest rate reforms," Lu Zhengwei, chief economist with the Industrial Bank, told Xinhua.

And the offering of deposit certificates in the interbank market is expected to improve the Shanghai Interbank Offered Rate (Shibor). measuring the cost at which Chinese banks lend to one another, which will set pricing standards for the future launch of Large Negotiable Certificates of Deposit (NCD).

According to the report, NCDs usually inspire breakthroughs in interest rate reform in other countries, which generally call for deposit insurance systems to be in place beforehand.

China's launch of deposit certificates in the interbank market will lower potential risks as well as gaining experience for the NCDs before the country establishes deposit insurance system, according to the Shanghai Securities News.

Wang Tao, chief economist with UBS Securities, said the certificates are more stable and more transparent financial products helpful for improving banks' liquidity management, especially when liquidity becomes tighter.

He forecast that the PBOC may allow commercial banks to issue large certificates of deposit to non-financial enterprises and common citizens in the future, and remove the caps of long-term and short-term deposit interest rates step by step, a process which will take time.

As a step toward fully floating interest rates, the guideline required financial institutions to report their annual plans for the issuance of deposit certificates to the central bank before entering the market.

The PBOC set the one-time minimum volume at 50 million yuan (8.18 million U.S. dollars). which allows banks to borrow at more stable costs in the interbank market.

The issuance will be priced in reference to the Shibor, with the maturities of fixed-rate certificates ranging from one month to a year with those of floating-rate certificates ranging from one year to three years.

The trial is part of China's loosening of controls on deposit rates following its move in July to scrap the floor limit of lending rates.