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Exclusive: China's banks to take next step in rate reform push - sources

A woman walks past a sign of Bank of China at its branch in Beijing March 26, 2013. REUTERS/Kim Kyung-Hoon
A woman walks past a sign of Bank of China at its branch in Beijing March 26, 2013. REUTERS/Kim Kyung-Hoon

By Shengnan Zhang and Hongmei Zhao

BEIJING/HONG KONG (Reuters) - China's top banks are expected to win approval for the issuance of tens of billions of yuan in negotiable certificates of deposit (NCD) as early as next month, in another step towards developing market-determined interest rates.

NCDs would enable banks to access large amounts of funds at relatively stable costs, providing some alternative to borrowing from the inter-bank market, where the cost of funds can be volatile, as seen in June when a liquidity squeeze briefly sent short-term money market rates to nearly 30 percent.

Bank of China, the Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank and Bank of Communications, have submitted their plans for NCDS to the central bank, people familiar with the development told Reuters.

The NCD, or large denomination certificates of deposit tradeable on the interbank market, would be offered with maturities from three to six months and be priced with a premium over the Shanghai interbank offered rate (SHIBOR), the sources said.

Each bank is planning an NCD issuance of more than 10 billion yuan ($1.63 billion), one of the sources said. The likely face value of single certificates was unknown.

"The instrument could be rolled out soon, which not only opens up a liquidity channel for banks but also pushes forward interest rate reforms by gradually loosening controls on deposit rates," said a source close to the banking regulator.

The People's Bank of China (PBOC), the central bank, could give its approval as early as September, according to the sources, who all requested anonymity due to sensitivity over the issue.

The central bank, under the helm of reform-minded Zhou Xiaochuan, has been trying to promote the role of the SHIBOR as the benchmark for short-term borrowing costs.

The PBOC has been following a step-by-step approach in liberalizing interest rates, shifting its focus on loosening controls on bank deposit rates after it freed up bank lending rates in July.

Last month's decision to remove the floor on bank lending rates was seen as a largely symbolic prelude to removing caps on deposit rates, a much more difficult task that will take time.

Interest rate reforms are part of a broader effort of China's new leadership to steer the world's second-largest economy towards a growth model that relies more on domestic consumption and gradually scale back controls and directives and allow market forces to play a greater role.

The introduction of NCDs may have limited immediate impact on money market rates that are already moving in line with market supply and demand, but the pilot is widely seen as a heralding the eventual dismantling of controls on bank deposits rates.

The sources said that permission for NCDs will be expanded to other banks and non-banking institutions, paving the way for launching certificates of deposit for corporate and individual investors.

The central bank was not immediately available for comment.

The central bank has said that more preparations, including a deposit insurance scheme, are needed before a move on deposits. Economists said its caution also reflected concerns that freeing up deposit rates would squeeze banks' profits.

In 2012, the central bank gave lenders freedom to set a ceiling for deposit rates at up to 110 percent of the benchmarks set by the PBOC. The current benchmark for a one-year deposit, for example, is 3 percent. Analysts expect the PBOC to remove the ceiling slowly and cautiously in order to reduce risks to the banking system. ($1 = 6.1234 Chinese yuan)

(Writing and additional reporting by Kevin Yao; Editing by Simon Cameron-Moore)

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