Why Does the Negotiable Certificate of Deposit Matter for Chinese Banking?

Abstract

The Negotiable Certificate of Deposit (NCD) is a major financial instrument in China; the value of outstanding Chinese NCDs was approximately RMB8 trillion (equivalent to USD1.2 trillion) in mid-2017. This article reviews the most recent developments in the Chinese NCD, including its effect on interest rate pass-through and money creation. Empirical results show that the introduction of the NCD in 2014 influenced the relationship between the policy rate and the lending rate of Chinese commercial banks, and the interest rate pass-through from the policy rate to the lending rate of commercial banks improved subsequently. However, this process has also been accompanied by maturity mismatch, increasing leverage, and decreasing credit ratings for the assets of banks and other financial institutions. Consequently, systemic risk in the Chinese banking system has increased.JEL codes: E52, E58.

Foreign Investments in the Chinese Bond Markets

“…The policy bank bonds are bonds issued by Chinese policy banks. The non-negotiable certificate of deposit refers to the book-entry time deposit certificate issued by the deposit-taking financial institutions in China's interbank market (Liu, 2018a). A medium-term note is a debt note that usually matures in 1-10 years.…”

Chinese banking failure: the case of Baoshang Bank and its implications

“…From the liability side, the Baoshang Bank has been increasingly relying on interbank borrowing including negotiable certificate of deposit (NCD) as a major source of funding. In a pioneering research on Chinese NCD market, Liu (2018a) argued that the introduction and rapid development of NCDs is part of China’s new monetary policy framework, and the year 2015 is a turning point. Although from 2015 the PBC began to provide liquidity through other relending facilities including short-term liquidity operations, standing lending facilities (Liu, 2019a), mid-term lending facilities and pledged supplementary lending, the PBC requires commercial banks to provide collaterals or pledges to access these facilities.…”

“…Table 2 shows that the fraction of interbank borrowing has increased from just around 7% as of the fourth quarter of 2009 to around 32% as of the third quarter of 2017. As Liu (2018a) stated, from April 11, 2017, according to new regulatory requirements, the total of interbank borrowing including interbank deposit/borrowing, buyback resale/sellback repurchases, and NCDs should not exceed one-third of total liabilities, showing that the Baoshang Bank has failed to meet the regulatory requirement.…”