China's new guideline on deposit certificates in the interbank market became effective as of December 9. The trial is part of China's loosening of controls on deposit rates following its move in July to scrap the floor limit of lending rates.

The guideline published by the People's Bank of China, the central bank, will help increase the range of debt products offered by financial institutions, so as to better prepare for the gradual liberalization of interest rates.

The offering of deposit certificates in the interbank market is expected to improve the Shanghai Interbank Offered Rate (Shibor), measuring the cost at which Chinese banks lend to one another, which will set pricing standards for the future launch of Large Negotiable Certificates of Deposit (NCD).

NCDs usually inspire breakthroughs in interest rate reform in other countries, which generally call for deposit insurance systems to be in place beforehand.

China's launch of deposit certificates in the interbank market will lower potential risks and gain experience for the NCDs before the country establishes a deposit insurance system.

A step toward fully floating interest rates, the guideline requires financial institutions to report their annual plans for the issuance of deposit certificates to the central bank before entering the market.

The central bank set the one-time minimum volume at 50 million yuan ($8.18 million), which allows banks to borrow at more stable costs in the interbank market.

The issuance will be priced in reference to the Shibor, with the maturities of fixed-rate certificates ranging from one month to a year with those of floating-rate certificates ranging from one year to three years.