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

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  • Kerry Liu

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.

Suggested Citation

  • Kerry Liu, 2018. "Why Does the Negotiable Certificate of Deposit Matter for Chinese Banking?," Economic Affairs, Wiley Blackwell, vol. 38(1), pages 96-105, February.
    • Handle: RePEc:bla:ecaffa:v:38:y:2018:i:1:p:96-105
    DOI: 10.1111/ecaf.12271
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    References listed on IDEAS

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    1. Kerry Liu, 2017. "China's Interest Rate Pass-through to Commercial Banks Before and After Interest Rate Liberalisation," Economic Affairs, Wiley Blackwell, vol. 37(2), pages 279-287, June.
    2. Carlson, Mark & Wheelock, David C., 2018. "Near-money premiums, monetary policy, and the integration of money markets: Lessons from deregulation," Journal of Financial Intermediation, Elsevier, vol. 33(C), pages 16-32.
    3. Emily Perry & Florian Weltewitz, 2015. "Wealth Management Products in China," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 59-68, June.
    4. Tao Zha & Jue Ren & Kaiji Chen, 2016. "What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending," 2016 Meeting Papers 82, Society for Economic Dynamics.
    5. Scott Winningham, 1979. "The effect of money market certificates of deposit on the monetary aggregates and their components," Economic Review, Federal Reserve Bank of Kansas City, vol. 64(Jul), pages 20-29.
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    Cited by:

    1. Kerry Liu, 2020. "Chinese consumer finance: a primer," Frontiers of Business Research in China, Springer, vol. 14(1), pages 1-22, December.

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