Will Deposit Certificates Help Chinese Banks, Economy?

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China

China is getting one step closer to eliminating its deposit rates, an economic control which, if eliminated, could have wide-ranging effects on the nature of the market there.

Banks and lending institutions there have long been subject to only shareholder capital as a means for lending, with deposits being unusable for that purpose, as well as garnering a state-determined rate. Banks were allowed a bit of leeway as of last year to set their deposit rates, and were granted license to put their rates up to 110 percent of the government-determined benchmark.

Yet more liberalization is likely needed if China is going to find substantial growth, and that growth is likely to be in demand with global market forces rather than manipulations by the Chinese government.

As such, the People’s Bank of China has moved closer to freeing deposit rates. It is now planning to allow the issuance of negotiable certificates of deposit in a move that could generate a lot of capital for Chinese banks, according to Reuters. This mechanism will grant banks a reprieve from merely tapping the interbank market or raising capital from shareholders.

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