CDs liberalization 'a step forward'

According to sources in the banking industry, large-denomination certificates of deposit will be available to individuals and companies on a trial basis starting as early as this week to allow a gradual introduction to the market, The Wall Street Journal has reported. Wang Yueling / For China Daily

Higher interest rates could help banks attract large depositors

The People's Bank of China will allow commercial banks to offer large-denomination certificates of deposit to individuals and companies, a further step to free up interest rates, The Wall Street Journal reported.

According to sources in the banking industry, the CDs will be available on a trial basis as early as this week to allow a gradual introduction to the market, according to The Wall Street Journal. During a test run involving more than 10 banks, the interest rate will be set at 3.4 percent for one-year CDs with a minimum investment of 100,000 yuan ($16,035), the Journal said.

The interest rate is slightly higher than the maximum rate of 3.3 percent for one-year term deposits that has been offered by commercial banks in China since July 6, 2012.

E-mailed questions sent to the PBOC and some major State-owned commercial banks weren't answered by press time.

"Even though the interest rate isn't much higher than on deposits, the issue of CDs is an important means to push forward interest rate liberalization," said Wen Bin, director of macroeconomic research at the Bank of China Ltd's Institute of International Finance.

"Once the banks issue CDs, their borrowing sources will become increasingly market-oriented. Large individual and corporate depositors will no longer be restricted by the maximum deposit rate, which is likely to float more than 10 percent up from the benchmark one-year deposit rate of 3 percent," he said.

For some large depositors, the interest rate of 3.4 percent on one-year CDs is more attractive than the maximum fixed-term deposit rate of 3.3 percent with the same maturity, so the difference will help the banks attract a steady flow of large deposits.

But financial experts said that the rate is still far from competitive in the current domestic money market.

"Compared with various wealth management products, the CDs could only attract clients with a very low risk tolerance," said Mu Hua, a banking analyst at GF Securities Co Ltd.

The seven-day annualized yield of Yu'ebao, an investment product offered through Alibaba Group Holding Ltd's online payment affiliate Alipay, was 4.83 percent on Sunday.

Even commercial banks offer an average annualized return of about 4.3 percent on wealth management products, which offer preservation of capital.

"But in the long run, certificates of deposit may attract more clients if China launches a deposit insurance system, as the system will cover CDs, not wealth management products," Mu said.

The central bank is trying to reduce the impact of CD issues on commercial banks by targeting the product at high-end clients. The minimum investment will keep a large number of depositors from shifting their money from deposits into CDs, according to Wen.