China interest-rate reform edges forward with bank prime loan rate

Major banks will be allowed to charge prime rate based on lending to favoured customers

PUBLISHED : Saturday, 26 October, 2013, 2:56am
UPDATED : Saturday, 26 October, 2013, 2:56am

The People's Bank of China is easing its control over interest rates with the introduction of prime loan rates based on lending reports by the mainland's major banks.

The arrangement, which will allow lenders to price their loans based on the prime rates, marks another step towards interest rate liberalisation. Under the reform process, the policy rate system determined by the central bank will be phased out.

The government paved the way for the reform by scrapping a floor for lending rates in July.

The prime loan rates would be decided based on the daily reporting of nine commercial banks on the lending rates offered to their best corporate clients, the central bank said in a statement yesterday.

The first reading was 5.71 per cent for one-year lending, lower than the benchmark rate of 6 per cent. Analysts regarded this figure as reasonable as the banks' most favoured clients usually get some discount.

The nine banks participating in the reporting system are the mainland's biggest lenders by assets - comprising the five major state-owned lenders, including Industrial and Commercial Bank of China and Bank of Communications, and four joint-stock banks including China Citic Bank and China Merchants Bank.

The weightings of the banks in setting the prime rate would vary, based on each lender's share of the total loans outstanding in the past quarter, the statement said.

The [PBOC] will be more cautious with liberalising deposit rates

This means the biggest banks will have the most clout in deciding the prime rates. The five biggest state lenders had combined assets of 63.8 trillion yuan (HK$81.3 trillion) at the end of June, accounting for 44 per cent of the industry's total.

The central bank said it would continue to publish benchmark lending rates to guide banks in setting reasonable rates during the transition period.

"We expect no immediate impact from this change, but introducing [prime lending rates] means that the PBOC has pretty much given up the benchmark lending rates as policy rates," said Societe Generale economist Yao Wei. The central bank would be more cautious with any move to liberalise deposit rates, she said, which is is widely seen as a more crucial step towards a market-based pricing system.

Yao expects the central bank may move in this area at the end of the year. The government might first introduce certificates of deposit, under which interest rates could be negotiated, as well as establish a deposit insurance scheme and bankruptcy law for financial institutions, she said.

The Communist Party will hold a key meeting next month to discuss economic and political reform for the next decade.

Guo Tianyong, a researcher at the Central University of Finance and Economics, said the mainland would eventually adopt the Shanghai interbank offered rate as the rate-setting benchmark.