China PBOC Halts Long-Term NCDs to Prevent Capital Misuse

By William Bi

     BEIJING (MNI) - China's central bank said on Thursday it will prohibit the

issuance of long-term negotiable certificates of deposit (NCDs) to keep excess

liquidity from circulating in the financial system. 

     Starting Sept. 1, NCDs, a form of interbank lending, cannot carry terms

longer than a year, the People's Bank of China said on its website. Previously,

the instruments could be issued for up to two or three years, it said. Long-term

NCDs previously issued will be allowed to expire, it said.

     The move will "nudge NCDs back to their nature of supplementing capital

shortages within the financial system," Sun Guofeng, the PBOC's director of

financial research, said in a report on the bank's Financial News website, which

was published at about the same time as the official announcement. 

     Sun said the move will also "boost the ability of using finance to support

the real economy," China's way of saying it wants to prevent funds from being

used for purely speculative purposes.  

     However, Sun played down the impact of the move on the market, stating that

long-term NCDs issued in the first half this year totaled CNY37.2 billion, only

0.4% of the total, while their outstanding balance on June 30 was CNY111.5

billion, or 1.4% of the total.

     In recent years, interbank lending has become the fastest-changing item on

banks' balance sheets as banks' traditional income sources of deposits and

lending get squeezed, drawing attention from regulators, Liu Lina, a researcher

with the China Banking Regulatory Commission, wrote in an article for the

economic advisory group China Finance 40.  

     The move is likely to prevent the funds from being mismatched with their

intended purposes and directed to speculate on properties, according to

interbank transaction traders who spoke to Market News. 

     These traders also said the impact is largely symbolic given the

insignificant value of the targeted NCDs. 

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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