On 8 December 2013 the Peoples' Bank of China (PBOC) announced the launch of a new segment of money market instruments, NCDS, in a further step to liberalise its quasi fixed deposit rate regime and to move towards a regime of market-driven interest rates.

These new instruments are currently reserved for issuance by banks approved by PBOC (as of 12 December 2013 the PBOC had approved 10 issuers) and are currently restricted to deposit-taking financial institutions, policy banks and commercial banks which are assigned an annual quota. The first issue of NCDs, totalling CNY19bn (USD3.1bn), was offered Thursday last week.

NCDs are referenced against the Shanghai interbank offer rate and can be purchased by other banks and eligible asset managers which are members of the interbank market, but not other financial institutions or private individuals.

Other characteristics of NCDs include: -fixed NCDs with tenors of one, three, six, nine and 12 months or floating NCDs with tenors of one, two and three years -a minimum issue size of CNY50m -NCDs are traded on the inter-bank market and can be used as collateral in repo markets -NCDs will be valued on a mark-to-market basis with designated market-makers required to quote two-way prices Fitch considers the new instruments eligible for inclusion in its rating analysis of 'AAA(chn)'-rated CMMFs provided the issuing bank has a minimum Long-term rating of at least 'A-' by an international rating agency, in line with its national scale money market fund criteria.

Current eligible issuers therefore are: China Development Bank (A+/Stable), Industrial and Commercial Bank of China (A/Stable), Agricultural Bank of China Limited (A/Stable), Bank of China (A/Stable), China Construction Bank Corporation (A/Stable), and Bank of Communications (A/Stable). Any NCDs issued by two other policy banks, Agricultural Development Bank of China (A+/Stable) and Export Import Bank of China (A+/Stable) would also be considered by Fitch to be eligible for its rating assessment of CMMFs.

Fitch would also apply its stated limits for tenors (maximum 397 days for fixed-rate instruments and two years for floating-rate instruments) and issuer concentration when considering the eligibility of NCDs for rating consideration of CMMFs.

However Fitch would consider NCDs for the time being as less conventional assets with limited secondary market liquidity and therefore group them under the illiquidity bucket. The 20% maximum bucket under Fitch's National Rating scale MMF criteria includes among others, unbreakable deposits and repos above seven days and most policy bank FRNs above 397 days as well as non-financial corporates - depending on issuer and liquidity of the instrument.

Fitch expects rated funds to initially make conservative use of the new instruments until their market liquidity and spread volatility can be assessed with more certainty.

Additional information is available at fitchratings.com.
Applicable criteria 'Global Money Market Fund Rating Criteria', dated 26 March 2013 and 'National Scale Money Market Fund Rating Criteria' dated 19 July 2013 are available at fitchratings.com.

Related research: ''Chinese MMF Assets See Major Outflows' dated 25 July 2013, 'Rated Chinese MMFs Weather Volatility' dated 26 June 2013, and 'Concentrated Flows Drive Chinese MMF Assets Rebound' dated 11 November 2013 are available at fitchratings.com.
Applicable Criteria and Related Research:
- Global Money Market Fund Rating Criteria
- National Scale Money Market Fund Rating Criteria
- Assessing Chinese Money Market Funds - Principal Preservation and High Liquidity

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