Interbank rule changes give mainland banks advantage

Mainland banks will emerge as clear winners over their foreign rivals if the latest proposed shake-up of China's interbank regulations proceeds.

When the People's Bank of China (PBOC) flagged regulation changes last week, analysts initially focused on news that domestic banks would also have their access to interbank borrowing capped at 40 per cent of total liabilities.

In a controversial move earlier this year that stung foreign banks into angry protest, the PBOC said it would cap their access to interbank funding at the same ratio.

But closer examination of the draft changes published by the PBOC for comment shows that domestic banks could benefit greatly from changes also proposed to the tenor of their interbank borrowing.

Under existing rules, domestic lenders are given a maximum of 12 months for 'repo' funding, or raising funds by selling commercial papers; and up to three months for 'clean funding', or raising funds without issuing paper.

Foreign borrowers on the interbank market were permitted longer borrowing tenors because of their lack of yuan funding sources - up to 18 months for repo funding and more than two years for clean funding.

The changes proposed to the interbank regulations announced by the PBOC last week will now enable all the participants in the interbank market - both domestic and foreign - to engage in interbank borrowing and lending up to a maximum tenor of three years.

The PBOC is inviting recommendations to the draft rules by December 15.

China Merchants Bank's planning and funds department official Liu Xiaole says the new draft rules 'will enable banks with lending capability and strong risk management to take out long-term loans to meet with the market demand for long-term funding and lending needs'.

The Shenzhen-based bank, one of the mainland's four listed banks, is one of the financially sounder banks in China.

Interbank lending, to which the rules announced on Tuesday apply, is restricted to activity among banks only. Its tenor is between four months and three years under the draft rules.

Arthur Lau, Fitch ratings agency's China banking analyst, foresees huge demand in China for medium- to long-term funding.

'China is a developing country which calls for huge capital involvement and financing needs over a long term. There is real demand for medium- to long-term funds,' Mr Lau told the South China Morning Post.

Up to now, China's financial institutions had depended on the interbank market for financing because of the comparatively underdeveloped capital markets and a lack of diversity in financial products, Mr Lau said.

'In a more sophisticated financial market like Hong Kong, for example, syndicated loans and other forms of debt financing are commonly used financial tools for fund raising, whereas in China, issuers do not have much of a choice other than bank financing,' he said.

With the extension to three years now allowed for interbank funding, the interbank market would partially act as a capital market by allowing participants to tap the market for medium-term funds, he said.

This would vastly increase the opportunities available to China's big domestic banks to make secure loans with their surplus funds.

Short-term rates charged for funds raised on the mainland's interbank market - a virtual marketplace accessed through remote transaction terminals - are still regulated by the PBOC.

At present, for example, the benchmark rate that may be charged for loans of 20 days and below is 2.7 per cent - a rate last adjusted in February this year. Lenders may charge a maximum of 10 per cent above the PBOC-set benchmark rate, or 2.97 per cent.

However, the rates charged on loans with a tenor of more than one year may be freely negotiated between parties.