Full liberalization expected this year: experts
China is expected to fully liberalize its interest rate mechanism this year, experts said Wednesday, after the central bank on Tuesday released guidelines for banks to issue large-scale certificates of deposit (CDs).
The move on CDs has been seen as the last step before full interest rate liberalization, experts said.
"The launch of the large-scale CDs could help financial institutions to improve their pricing abilities and gain experience for a full interest rate liberalization," the People's Bank of China (PBC), the central bank, said in a statement posted on its website on Tuesday.
Issuance of the CDs will initially be piloted at some banks before being gradually expanded later on, the PBC said.
Individuals need a minimum of 300,000 yuan ($48,420) to buy the large-scale CDs, while the threshold for institutions is 10 million yuan. Insurance companies and the social security fund are also allowed to invest in the CDs, according to the PBC.
Interest rates for the CDs will be mainly determined by the market. Banks can set a fixed or a floating rate for the CDs, and the floating rate will be based on the Shanghai Interbank Offered Rate (Shibor) as a benchmark, the PBC said in the statement.
The Shibor, which measures costs of interbank borrowing, stood at 3.191 percent for six-month loans and 3.408 percent for one-year loans on Wednesday.
"Smaller banks are more motivated to offer higher interest rates for the large-scale CDs in order to gain deposits," Liu Dongliang, a senior analyst at China Merchants Bank, told the Global Times on Wednesday.
The large-scale CDs will be covered by the country's deposit insurance system, according to the PBC.
The deposit insurance system, which took effect on May 1, was also seen as a vital step toward the liberalization of the banking sector as it guarantees reimbursement for savers if their banks suffer insolvency or bankruptcy, analysts said.
China has been attempting to liberalize its interest rate mechanism since 1996. In July 2013, the PBC removed controls on lending rates but banks still need to set deposit rates within a range set by the PBC.
On May 10, when the PBC announced a cut in interest rates for the second time since the beginning of this year, it lifted the ceiling for deposit interest rates to 1.5 times the central bank's benchmark rate, from the previous ceiling of 1.3 times, in a move to further liberalize interest rates.
Experts said that the central bank is expected to fully remove the ceiling for deposit rates along with the next interest rate cut, which is likely to come in a couple of months.
"The launch of the large-scale CDs has offered a new deposit-soliciting channel for banks and a new investment channel for individuals," Xu Hongcai, director of the Economic Research Department at the China Center for International Economic Exchanges, told the Global Times Wednesday, noting that the move could help reduce liquidity risks for banks.
Banks are suffering difficult times as the bullish stock market and the boom in Internet finance has been draining deposits from them. Experts noted that the launch of the large-scale CDs has offered a way for banks to win back some deposits.
There are concerns that the launch of the large-scale CDs may divert some funds from the stock markets. But Liu from China Merchants Bank said the markets will not be heavily affected as large-scale CDs will mainly attract more "cautious" investors.
Compared with fixed deposits and regular financial management products from banks, the large-scale CDs are tradable before their maturity dates and can be mortgaged for loans, according to the PBC.
This flexibility will appeal to investors and the large-scale CDs may divert some investors away from banks' financial management products, experts said.
