Winners from Beijing's latest move

Mid-sized banks, less privileged borrowers and savers will benefit most from the introduction of negotiable certificates of deposit, according to economists.

The People’s Bank of China is to allow Chinese commercial banks to issue negotiable certificates of deposit on the interbank market, a breakthrough in the process of the country’s liberalising its interest rate.

China’s central bank currently sets a benchmark rate for deposits and only allows banks to offer interest rates of up to 1.1 times the benchmark level. The issue of NCDs, a savings certificate entitling the bearer to receive interest, will let the market decide the interest of deposits. 

According to PBoC’s rules, the pricing of NCDs will refer to Shanghai’s interbank offered rate (Shibor) and be freely set by markets. The NCDs of a required minimum size of Rmb50 million will have tenors from one month to three years, among which those of less than one-year maturities will be fixed-rate while those with tenors from one year to up to three years will have floating rates.

The rules should have a positive impact on China’s economy as market-determined interest rates should more efficiently allocate precious capital, although financial institutions have already been borrowing from each other in the interbank and bond markets with rates determined by the market.

The market reacted mildly on Monday with shares of the banking sector dropping slightly 0.62% and 0.03% in Shanghai and Hong Kong, while the two composite indexes rose 0.05% and 0.29%, respectively.

However, mid-sized banks performed better than large ones by closing flat or even edging up slightly. China Minsheng Banking and Citic Bank rose 0.11% and 0.04% in the H-share stock market.

Big banks will have to offer attractive rates for funds with the interest rate control lessened. “While some big banks’ net interest margin could be squeezed, some better managed nimble banks could seize the opportunity to expand their client base,” said Lu Ting, the China economist with Bank of America Merrill Lynch.

From the perspective of borrowers, less privileged borrowers, such as private-owned companies or developers, could be less impacted, because they had difficulties in borrowing from banks and counted less on loans for funds.

However, some privileged SOEs might pay higher funding costs, as increasing deposit rates will push up banks’ lending rates, which decreases the SOEs’ earnings on arbitraging, according to Merrill’s Lu.

Chinese savers will become winners from NCD issues because they can get higher rates by investing in those NCDs through access to funds (including mutual funds). Banks will pay interest on NCDs to attract money, while bank deposits rates are still controlled by the PBoC and comparably low in China.

“NCDs will reflect the actual cost of funds more accurately compared with Shibor as their interest rates are trade-based,” said Raymond Yeung, senior economist of Greater China with ANZ.

Yeung also believes that the onshore NCD market will serve as a reference in the long term for pricing of renminbi certificates of deposit in the offshore market, despite their different liquidity conditions. “A fully-developed NCD interest curve will provide a reference to the offshore interest rate,” said Yeung. 

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