* PBoC introduces negotiable CDs in step towards
* New security offers market-based gauge of funding costs
* Shibor link will help boost relevance of benchmark rate
By Carrie Hong
HONG KONG, Dec 13 (IFR) - China took another big step
towards full interest rate liberalisation this week with the
first issues of negotiable certificates of deposit.
As well as opening a new source of liquidity for banks, the
creation of the new security will create the country's first
transparent, market-based gauge of deposit rates, paving the way
for the eventual removal of central bank controls.
Within five days of the People's Bank of China unveiling
guidelines, 10 banks had sold Rmb34bn (US$5.6bn) of negotiable
CDs in the interbank market, underlining the extent of demand
for the product.
The structure is still being tested by the PBoC, though.
Only the top 10 banks by total assets are eligible to issue
negotiable CDs for now, and the bonds are only available to
participants in the interbank market, not individuals or
Analysts expect the pilot scheme to grow as more investors
are allowed to participate, lifting the use of market-determined
rates and creating a transparent pricing benchmark.
"It is likely that the interbank negotiable CD is just the
prelude for a broader negotiable CD that can be sold directly to
corporates and individuals. Based on the US experience, we
believe that in equilibrium, medium and small banks would rely
much more on negotiable CDs as a funding source, with
24% of total deposits replaced by negotiable CDs, while
negotiable CDs at large banks would account for only
9%," said May Yan, head of banks sector research for Asia
ex-Japan at Barclays in a client note.
The PBOC dictates loan and deposit rates in China, but has
been gradually introducing market-determined benchmarks as it
works towards liberalising interest rates. It loosened controls
for most loans in July and has introduced a market-set loan
prime rate as an alternative to the central bank's own lending
benchmark. Deposit rates are still subject to an upper limit.
The new product will also help boost confidence in the
Shanghai interbank offered rate (Shibor) system. The PBoC has
been trying to promote the Shibor as the benchmark for
short-term borrowing costs, but traders said that they prefer
taking short-term repos as trading references. Market
participants complain that Shibor offers "no real traded prices
especially in longer-tenor categories," with rates at six-months
and beyond typically quoted far lower.
"If the negotiable CDs market can take over the [direct
deposit] deals in the future, I think Shibor might regain its
market recognition and be a real market-oriented benchmark as
with Libor," said one senior bank trader, referring to the
current situation by which banks offer term deposits to each
Before the launch of the negotiable CDs, China's banks
resorted to making deposits with each other at pre-agreed prices
that were not publicly disclosed or pegged to any benchmark.
Those private interbank deposits cannot be publicly traded or
used as collateral in the secondary, in contrast to the
One week into the official kick-off of the new security, it
seems to be a hit already. The country's top five lenders
brought the debut batch of Rmb19bn (US$3.13bn) of negotiable CDs
on December 12 and other five comparatively smaller banks
followed with a total of Rmb15bn the next day. All but one of
this week's transactions offered yields below Shibor.
"With negotiable CDs, we can access to large amounts of
funds at relatively stable costs from the market," said a
banker. "It is a very efficient liquidity management tool for
Bankers also pointed out that the comparatively long tenors
of negotiable CDs allow for better asset-liability matching and
overall liquidity management. Once the structure is widely
available to investors it will also provide an avenue to raise
funds if direct interbank lending seizes up as it did on June
20, when short-term money market rates spiked to nearly 30%.
Agricultural Bank of China, Bank of China, China
Construction Bank, and Industrial and Commercial Bank of China
offered template deals of Rmb3bn for three months, Rmb5bn for
three months, Rmb5bn for three months and Rmb3bn for one month
at yields between 5.064% and 5.1708%. Three-month Shibor is
currently around 5.32%. The biggest policy bank, China
Development Bank, priced a Rmb3bn six-month negotiable CD to
yield around 5.30%, in line with the other lenders but higher
than the 4.52% quote for six-month Shibor.
Market participants, however, were sceptical that the first
negotiable CDs offer a good read on market appetite. "For the
debut offerings, the banks are the main buyers of each other's
deals, and that is why the yields are relatively low," said an
asset manager from a securities house. "I also bought some but
just as a favour to one of the banks."
Five more banks joined the issuing queue on Friday with
deals totalling Rmb15bn (US$2.47bn). Bank of Communications,
Shanghai Pudong Development Bank, China Industrial Bank, China
Merchants Bank, and China Citic Bank, each offered negotiable
CDs of Rmb3bn and all, with the exception of CIB, which issued
at a tenor of one month, had maturities of three months.
All deals were issued on the China Foreign Exchange Trade
System and settled in the Shanghai Clearing House.
(Reporting By Carrie Hong; editing by Christopher Langner and