China's Major Banks Hike Max Interest Rates for Certificates of Deposits to 45% Above Benchmark

China's Major Banks Hike Max Interest Rates for Certificates of Deposits to 45% Above Benchmark

She Qingqi

Date: Mon, 04/23/2018 - 16:56 / source:Yicai
China's Major Banks Hike Max Interest Rates for Certificates of Deposits to 45% Above Benchmark
China's Major Banks Hike Max Interest Rates for Certificates of Deposits to 45% Above Benchmark

(Yicai Global) April 23 -- China’s banking regulators recently gave domestic banks the go-ahead to raise the maximum interest rates for certificates of deposit (CDs), meaning that regulatory authorities have granted them, albeit quietly, greater autonomy over interest rate formation in a bid to drive rate liberalization.

Major state-run banks, joint-stock banks and urban and rural commercial banks have hiked CD interest rates to 40, 42, 45, 50, 52 and 55 percent above the benchmark deposit rate respectively, a source at an urban commercial bank told Yicai Global.

Certificates of deposit are an important service provided by banks to attract funds from customers with relatively low risk appetite.

CD Rate Hike

A local branch of Pudong Development Bank Co. in Shanghai has increased the three-year CD interest rate to 3.99 percent this week, which is 45 percent higher than the benchmark deposit rate, our reporter learned. The branch previously capped CD rates at 40 percent above the benchmark.

China Construction Bank Corp. was the first to move. The bank raised the interest rate for one-year retail CD products to 2.175 percent (145 percent of the benchmark) on April 14, while the Liaoning branch of the Agricultural Bank of China Ltd. followed suit two days later.

Structured deposits have become very popular on the market lately, which might have acted as a catalyst for the CD rate hikes, several market insiders told Yicai Global.

Structured deposits, alternatively known as yield enhancement products, are an innovative banking service that combines interest rate and exchange rate products with traditional deposit products. It is intended for customers with relatively strict profit requirements, who are conversant with foreign exchange and interest rate markets and willing to bear a certain level of investment risk.

The boom in structured deposit products gave a boost to interest rate liberalization, as well as giving banks greater power in terms of autonomous pricing of deposit products, opined Liang Shichao, an analyst at Industrial Securities. However, structured deposits only make up a fraction of the overall liabilities in the banking sector, and the total volume of these products is still very small relative to traditional deposits priced based on the ‘statutory’ interest rates.

Several banking professionals detected increasingly clear signs that the rate liberalization process had accelerated, which manifested itself not only in the higher CD interest rates but also in the growing trend toward linking time deposits and loans with financial derivatives, they said in interviews.

The Beijing branch of a major state-owned bank has been considering releasing an interest rate swap with deposit and wealth management features, a source at the branch told Yicai Global.

Rate Liberalization Reform Campaign

China is pushing ahead with the interest rate liberalization reform, Yi Gang, governor of central bank, the People’s Bank of China (PBOC), noted at the recent Boao Forum for Asia, but under the current ‘dual-track’ system, deposit and lending benchmark rates are still set by the central bank, although money market rates have already been fully liberalized.

“Ideally, the [objective of our] reform is to harmonize the interest rates on both tracks,” Yi suggested.

Removal of the deposit pricing cap will help narrow the gap between “money market – deposit” and “lending – deposit” interest spreads, and banking institutions will be more willing to reflect relevant deposit businesses in their balance sheets. The PBOC is rumored to be mulling over lifting the deposit rate limit for commercial banks, Liang told Yicai Global.

Furthermore, he added, lifting the limit was unlikely to lead to significant increases in deposit rates over the short term, given the intense competition for deposits between commercial banks.

The deregulation of the CD interest rate market marked the start of interest rate liberalization, TF Securities’ Sun Binbin pointed out. Rises in CD rates will feed into “in-balance-sheet interest marketization”, which will have far-reaching implications for the entire financial and asset management markets.

Editor: William Clegg

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Keywords: Deposit Rate Change, Certificate of Deposit, Financial Reform, Market Orientation