China banks to launch large negotiable certificates of deposit soon

Minimal near-term impact seen.

According to Barclays Research, China will soon allow its commercial banks to issue large negotiable certificates of deposit (NCD) in the interbank market, which would be another step toward further liberalization of the nation's deposit rates. 

Here's more from Barclays Research:

Minimal impact near term, but an important intermediate step in pushing deposit rate deregulation: Near term, the issuance of NCDs will be restricted to the interbank market and the regulators are likely to apply a quota control initially.

Nevertheless, the development of interbank NCDs will further liberalize a portion of the deposits and help set benchmark rates in China, in our view.

Market rate-driven NCDs are much more expensive, adding funding pressure for banks: Deposit rates for NCDs will likely be higher than regulated rates, but lower than Shibor rates. Based on the US experience, we estimate rates for NCDs will likely be 100-200bps higher than regulated deposits rates. Historically, NCD rates in the US were on average 10bps lower than Libor rates. NCDs are only covered up to the deposit insurance cap in the US.

Banks to utilize NCDs as a proactive liabilities management instrument, with medium- to small-sized banks likely issuing more: International experiences shows that the amount of NCDs issued is closely related to the liquidity condition of the banks, and that banks proactively adjust the issuance of NCDs to manage liabilities.

In the US, large CDs account for an average 12%/35% of deposits at large/other banks. We estimate that an average 13-15% of China banks' deposits will eventually be NCDs, with large banks at 8.5% and other banks at 24%.

Manageable funding cost impact in the long term; impact more negative on smaller banks and moderate on large banks: We estimate (base-case scenario) that in five years once the NCD amount reaches equilibrium in China, the funding costs of our coverage universe could increase by 17bps on average, assuming the interest rates on NCDs are 150bps higher than those on normal deposits.

Large banks, with less reliance on NCDs, will likely fare better, and we estimate their funding costs could be raised by only 10bps on average, while medium- to small-sized banks could see funding costs increase 26bps.