China has started an insurance system for its over 100 trillion Yuan, that is around USS$21.3 trillion of the bank deposits on Friday, May 1, 2015 and the bond industry is preparing for the next step by now, that is, the end of the interest rate controls.
The banks that hold the maximum of the corporate bonds in the second largest economy in the world are limited to paying 30% more than a standard deposit rate, at present. That cap is very expected to be done away with this year, the central bank Governor, Mr. Zhou Xiao Chuan stated March 12, 2015.
While the Premier Li Keqiang is trying high to decrease the role of the government in the financial markets, he must make sure those reforms do not head to the financial contagion which has worsen the economic development already, as of now which is at the weakest stage since 1990. China had 2 massive failures on debt in April, 2015 when Baoding Tianwei Group Corp. became the 1st state-owned enterprise to get back on onshore notes and the Kaisa Group Holdings Ltd. turned out to be the 1st property developer that failed to pay on the securities, which are dollar denominated.
A bond analyst, Mr. Li Ning, working at Haitong Securities Co, which is the third largest listed brokerage in the nations stated, the deposit insurance system is part of the preparation for more credit defaults of the government. The liberalization in the interest rate might have a huge impact on the bond market as borrowing costs of the banks cannot go down that will, in response, prevent bond yields from rolling down in the coming 2 to 3 years because banks are the largest bond investors.