China’s Newly Launched CD Market May Benefit Midsized Banks The Most

China’s midsized banks are the most likely to benefit from the launch of a certificates of deposits (CD) market that the Chinese central bank announced this week, says credit rating agency Standard & Poor’s Ratings Services.

The reason is that Chinese midsized banks have greater reliance on short-term wholesale funding than the rest of the industry. Yet, Standard & Poor’s says the launch has an immaterial impact on its ratings on Chinese banks across the sector.

The People’s Bank of China officially launched the CD market on Dec. 9, 2013. Under the new guidelines, Chinese banks will be allowed to issue CDs at market rates to all participants in the domestic interbank market, and licensed domestic fund managers and their funds.

"The launch of the CD market is likely to be conducive to the liquidity management of Chinese banks because it broadens their funding and investment toolkit," says Standard & Poor’s senior director, Qiang Liao. "We also expect cost-savings for issuers because premiums for liquidity risks may be reduced."

CDs could be attractive from a creditors’ perspective because of the enhanced liquidity from a secondary market. Notably, one-month Shanghai Interbank Offering Rates (SHIBOR) dropped for several days after the CD market launch.

Given that the CDs will not be directly available to retail and corporate depositors at this stage, Standard & Poor’s do not expect any meaningful substitution effect to drive up the banks’ funding costs. However, the CD market may encourage greater competition from money market funds against bank deposits, and that may indirectly affect Chinese banks’ funding costs.

The launch of the CD market is in line with the Chinese policymakers’ intention of further liberalizing China’s interest rates. Standard & Poor’s expects the Chinese central bank to continue to gradually press ahead with interest rate liberalization and other reforms.

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