The People’s Bank of China (PBOC) has allowed eligible entities to issue and invest in interbank negotiable certificates of deposit (NCDs), as of December 9.
Although corporates are not able to buy or trade NCDs themselves at the moment, some commentators speculate the newly traded asset should bring up renminbi deposit rates in country and will be open to corporates eventually.
According to the PBOC announcement on 7 December detailing the rules of the new product, pricing and interest rates on NCDs are set by eligible issuers using the Shanghai inter-bank offered rate (SHIBOR), rather than non-market-based rates set by the Chinese central bank. Tenors on NCDs are available from one month to three years.
The market liquidity is “tight now”, according to a note from ANZ chief China economist Liu Li-Gang. But smaller banks, with a limited number of their branches and locations that compete with large banks for savings “will actively issue NCDs to raise funds".
Initial inter-bank NCDs will only be available for financial institutions currently participating in the Shanghai money market. The PBOC stated that a market-maker system will be established for the interbank market for NCDs, but a time frame for establishing the market-maker system was not specified.
Despite corporates not being able to buy interbank market-based CDs in China initially, economists argue that corporates will benefit from the new asset in various ways.
As banks compete to offer a higher deposit rate to CD buyers, economists argue they will also have to increase rates for savings deposits as a competing instrument for storing spare renminbi. ”Non-financial corporates will benefit,” confirmed Lu Ting, Chief China economist at Bank of America Merrill Lynch.
Various corporates, including Chow Tai Fook (CTF), have told CT that renminbi deposits and appreciation have led them to put more cash into renminbi accounts.
CTF gradually increased its renminbi deposits and now has Rmb3 billion to Rmb4 billion in its accounts and will keep this proportion, said CTF finance director Hamilton Cheng on December 11.
In addition to higher deposit rates, corporates may also see a benefit in increased liquidity for higher risk renminbi loans.
CDs, in large amounts and fixed periods, are relative stable deposits and will “provide a cushion” for banks who want to lend more to profit, said Liao Qun (pictured), chief economist and head of research department of China Citic Bank international.
Furthermore, various economists argued the new market should help corporates predict future renminbi lending rates, both onshore and offshore, and make better informed funding decisions.
“[The] onshore NCD market will serve as a reference for pricing of renminbi CDs in the offshore market, net of the difference in liquidity conditions," said Liu.
Launching CDs and launching deposit insurance are “two important steps towards the removal of China’s deposit rate ceiling”, said Mizuho Securities Asia chief economist Shen Jianguang, and “reflect that the government is determined to accelerate China’s financial reform”.
“In the future, NCDs could be extended to more banks and large corporations,” said Shen.