Provisional Regulations Issued to Allow Financial Institutions to Issue Certificate of Deposits

Provisional Regulations Issued to Allow Financial Institutions to Issue Certificate of DepositsCentral bank recently issued a provisional regulation that will allow financial institutions to issue certificates of deposits, thus giving banks more freedom in pricing interest rates. A certificate of deposit is a type of time deposit that will entitle the holder to receive a higher rate of interest rather than ordinary deposits which make it more appealing to savers. Individual investors can purchase the certificate of deposit worth up to 300,000 yuan and institutional investors can purchase certificate of up to 10 million yuan.

Interest on the certificates that will determined by the market and banks along with investors set a fixed rate or floating rate using the Shanghai Interbank Offered Rate as a benchmark. Shobor that measures costs of interbank borrowing stands at 3.189 percent for six months loans and 3.4175 percent for one year loans. Current interest rates for the six months and one year deposits cannot exceed 3.075 percent ad 3.4175 percent.

These certificates of deposits are tradable and can be used to mortgage for loans. These certificates are a new deposit soliciting channels for banks and are a safe investment for savers. Chinese banks are experiencing difficult times as a lot of wealth management programs and a strong stock market that has a higher return rate are draining large sums of deposits away from them. Certificate issuance is the fastest way to attract deposits and banks can win money back this way. But according to chief researcher of China Minsheng Bank Wen Bin, that this certificates are a test for banks.

According to Wen, higher deposits interest rates narrows profit margins and banks learned new tricks to maintain profitability. To control interest rates, China created a benchmark for financial institutions and allowed them to price deposits within a narrow band. China is now freeing up its grip on interest rates as shown in May when the central bank lifted the upper limit of the deposit rates floating bans to 1.5 times the benchmark from 1.3 times thus granting banks more pricing autonomy.

Last month deposit insurance was introduced and reimbursed savers when their banks suffer insolvency or bankruptcy and is seen as another step on this direction. Certificates of deposit give financial institutions more freedom and will push the liberalization of interest rates.

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