Advertisement
Advertisement
China economy
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
The central bank will calculate the average of those rates and publish it at 9.30am on the 20th of every month, starting from Tuesday, as the benchmark rate for the whole banking industry to follow. Photo: Xinhua

China changes the way bank loan rates are set, with HSBC left out of rate-setting club

  • Chinese central bank selects 18 lenders, including two foreign ones, to submit monthly rates that will be used to determine benchmark
  • People’s Bank of China says it will lower financing costs for corporate and individual borrowers

China has changed its system for deciding bank lending rates so that the central bank can effectively influence and control interest rates, a significant move in the world’s second-biggest economy.

The change – part of China’s long-standing pursuit of a market-based central banking structure – comes as the country’s economic growth is losing steam amid a protracted trade war with the United States and as Beijing seeks to cut financing costs for struggling small firms.

Under the new system, a club of 18 lenders selected by the People’s Bank of China will submit their one-year and five-year loan prime rates (LPR) – the lowest rate offered to their best clients – to the central bank on a monthly basis, the PBOC said in a statement on Saturday.

The central bank will calculate the average of those rates and publish it at 9.30am on the 20th of every month, starting from Tuesday, as the benchmark rate for the whole banking industry to follow.

It said the rate-setting group had been expanded to 18, from an existing group of 10 big banks, to “make [the group] more representative” by including foreign banks, rural commercial banks, city commercial banks and even private banks.

The foreign banks are Standard Chartered and Citigroup, according to an interbank rates website run by the PBOC. HSBC, which has the largest assets scale and number of outlets among foreign banks operating in mainland China, was not included in the rate-setting group.

Analysts said the omission of HSBC was conspicuous, but it was too early to say why it was left out of the group.

Kenny Tang Sing-hing, chief executive of Royston Securities, noted that HSBC was the largest bank in Hong Kong.

It’s not a surprise to see HSBC being left out considering what happened with Huawei earlier – it’s been widely speculated that this is related
Kenny Tang Sing-hing

“When thinking about foreign banks [in China], HSBC should be ranked before all others. This will not have any actual impact on HSBC’s business, but not being included is more like a symbolic move,” Tang said. “It’s not a surprise to see HSBC being left out considering what happened with Huawei earlier – it’s been widely speculated that this is related.”

HSBC played a key role in the United States’ attempt to extradite Huawei Technologies executive Meng Wanzhou from Canada over allegations of bank fraud and breaching sanctions against Iran. HSBC has said it provided information as demanded by the US Justice Department.

Clement Chan Kam-wing, managing director of accounting firm BDO, said it remained to be seen whether HSBC would be permanently excluded from the rate-setting group.

“We’re not sure what the exact criteria is, and it’s difficult to say why it wasn’t included this time. But considering that HSBC is quite active in China, it could still be included later – in the second or third round of selections,” Chan said.

The new system will weaken the role of the official benchmark rate set by the central bank – a legacy from China’s planned economy days when Beijing arbitrarily decided interest rates – by delegating the price-setting power to the 18 chosen banks, and lower financing costs for Chinese corporate and individual borrowers, the statement said.

The group also includes online lenders WeBank, owned by Tencent, and MyBank, backed by Alibaba Group, which also owns the South China Morning Post.

The PBOC did not specify the criteria it used for selecting banks to be part of the rate-setting group, but the statement said it would assess and review the member banks.

Although it is not part of the LPR group, HSBC remains one of the 16 banks, and the only foreign lender, providing price quotations for Shibor, the Shanghai Interbank Offered Rate for short-term loans – China’s answer to the benchmark Libor for major global banks.

HSBC said in statement that it is committed to the development of China’s financial markets and welcomes the new lending rate mechanism in China.

“We have participated in many initiatives to enhance the efficiency of financial markets and will continue to seek opportunities to contribute to financial sector reforms,” the bank said.

In the new system, the 18 banks will submit their LPR in the form of an “open market rate plus spread” – or a rate based on the bank’s borrowing rate from the PBOC plus the minimum additional rate for its best clients. The central bank will then disregard the lowest and highest rates and calculate an average of the rest to be used as the nationwide benchmark.

Banks have been told that the LPR benchmark must be used in all new loan agreements. Photo: AFP

Banks have been told by the PBOC that the LPR must be used in all new loan agreements – a major change from the existing practice where all loan contracts in China use the official benchmark rate. The one-year benchmark lending rate is 4.35 per cent.

According to the central bank, there has been an unwritten rule in the industry for lenders to reach tacit agreement on a floor rate, which is often set at 90 per cent of the official benchmark rate.

Hua Changchun, an economist with Guotai Junan Securities, said the move was expected to make it easier for changes to interbank market rates to flow through to banks and businesses in China.

“[The new system] will help to unclog the channels between monetary policy and the credit market,” Hua wrote in a note on the policy move.

This article appeared in the South China Morning Post print edition as: New system for setting bank loan rates
Post