China is allowing 39 new financial institutions, including three foreign banks, to issue large-denomination certificates of deposit (CDs) to individuals and companies paving the way for more market determined interest rates.

The new foreign banks who are allowed to issue CDs are OCBC Wing Hang Bank (China) Ltd, Bank of Tokyo-Mitsubishi UFJ (China) Ltd and Standard Chartered Bank (China) Ltd.

Also included are five domestic urban commercial banks and 31 rural commercial banks. There are currently 353 financial institutions that are able to issue CDs in China. The number has grown three times compared to the end of July 2015.

CDs are tradable deposit agreements that allow the market players to play a more important role in deciding the interest rates of financial products.

In a bid to liberalize the interest rates, the People’s Bank of China (PBOC) has issued a revised official guidance on supervision of market interest rates last March 2016. Under the guidance note, a supervision team consisting of qualified financial institutions was tasked to oversee the interest rate market. The team is responsible for setting pricing rules of the Shanghai Interbank Offered Rate (Shibor), Loan Prime Rate as well as other financial products. Apart from domestic commercial banks, foreign members such as HSBC, Bank of East Asia and Standard Chartered are members of the supervision team.

On June 15 2015, the first batch of nine banks including Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and Agricultural Bank of China (ABC) issued the first certificate of deposit in China. The minimum investment amount for retail investors and institutional investors are 300 thousand yuan and 10 million yuan respectively.

According to a regulation issued by PBOC in the same month, only retail investors, insurance companies, social protection fund and some other non-financial institutions authorized by PBOC are now allowed to invest in CDs.

China has been proactively boosting its interest rate reform to improve the efficiency of its financial market in recent years. “The interest rate liberalization is the core reform in China’s financial market. The liberalization can enhance the asset allocation in China, encourage financial institutions to evolve and add more flexibility to monetary policy in the future,” notes PBOC in its report issued in June.  

In October 2015, PBOC abolished the upper limit of the deposit interest rate, which marked an essential step in the liberalizing China’s interest rate market.