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