Will Deposit Certificates Help Chinese Banks, Economy?

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.

Rates are predicted to be more stable, as well, and this move further follows an initiative by the Chinese government to introduce more private banks into the economy there.

The private banks being introduced by China are designed to help prop up small- and medium-size businesses that are going to be needed if China’s growth rate is going to pick back up.

According to guidelines published on the central government’s website and reported by Reuters, China¬†”will actively develop small-sized financial institutions and open up the channel for private capital to enter the financial sector,” adding, “We will promote trials by private capital to initiate the establishment of private banks responsible for their own risks, as well as financial leasing companies and consumer finance companies and other financial institutions.”

That move is quite notable in a country where rules governing capital movement are notoriously stiff. Global demand and inability on the part of the banks to move enough money in lending prompted the shift, since small- and medium-size enterprises account for 60 percent of gross domestic product and 75 percent of new jobs.

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