MNI Analysis: China CD Limit Hike Not A Signal Of More Reform

     BEIJING (MNI) - The raising of the upper limit of the certificates of

deposit rates is a small step towards interest liberalization, but the process

will be very gradual.

     The CD interest rate ceiling, determined by self-discipline mechanism of

market interest rate pricing, has been relaxed under the guidance of the PBOC

from 40% and 42% and 45% higher than the benchmark CD rates for the "big-four"

state banks, larger private stock-holding banks, and small regional banks,

respectively, to 50%, 52% and 55% higher, according to Caixin. Some analysts

expected the legal deposit rate ceiling to increase by the same level.

     This move echoed the new PBOC governor Yi Gang's remarks at Boao last week,

saying the dual interest rates -- the market interest rates and benchmark

interest rates -- will gradually merge towards a unified market rate.

     NOT A SIGNAL OF MORE TO COME

     However, the rise in the CD rate ceiling does not signal that more major

rate liberalization moves are in order.

     Firstly, the motivation to raise CD rates does not only come from the need

for interest rate liberalization, but also from the banking system's hunger for

more deposit. The financial deleveraging campaign that started last year has

greatly reduced the growth of interbank liabilities and wealth management

products (WMP), causing banks to compete fiercely for stable liabilities like

deposits to match their assets, and satisfy regulators' test standards.

     As deposits and CDs have lower rates than the likes of WMP rates, money is

attracted to WMPs rather than deposits and CDs. Higher deposits and CD rates

will help banks to attract more deposits and help the process of converting

non-standard assets to loans. As the new asset management regulation rule will

likely ban banks from issuing new principle-guaranteed WMPs, CDs will have a

greater attractiveness as a replacement for principle-guaranteed WMP, which will

help stabilize banks' liabilities.

     Secondly, compared with the other possible choices, raising the CD and

potentially deposit rate ceiling is quite mild. In order to lead the deposit

rate higher, the PBOC could alternatively choose to hike the benchmark deposit

rate like some market participants had suggested .

     However, hiking the benchmark rate would have a stronger signal effect than

increasing the upper limit of CD rates. It would leave an impression to the

market that the PBOC is starting its tightening cycle, which might not be the

PBOC's true intention. Facing more economic uncertainties this year due in part

to the threat of a "trade war", and with credit growth slowing in March, the

PBOC needs to remain flexible.

     IMPACT LIMITED 

     The impact of raising the upper limit on CD rates is likely to be limited.

As the rising scale of the CD rate ceiling is relatively small and CDs only

takes up a small portion in banks' liabilities, there will not be too much

pressures on banks' funding costs resulting from rising CD rates. The

anticipated rise in the deposit rate ceiling will also likely have a limited

impact as most deposit rates are not close to the upper limit, especially for

demand deposits.

     Therefore, raising the CD rate ceiling cannot be interpreted as a

tightening signal, nor a significant liberalization move that will have big

impact on the financial system and market. It should be viewed as one small step

in interest rate liberalization and a move to assist the financial deleveraging

campaign. More significant moves towards interest rate liberalization will not

come any sooner.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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