10/25/2013 | 01:06am US/Eastern
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BEIJING--China's central bank took a key step toward making interest rates more market-driven on Friday, unveiling a new prime lending rate for the best corporate customers of the nation's commercial banks.
Analysts said the new loan rate--officially known as the "loan prime rate"--could eventually replace the benchmark lending rate that currently serves as a key guide for banks. Unlike that rate, which is set by China's central bank, the new prime rate would be set by Chinese lenders.
The prime lending rate won't eliminate government involvement in setting rates, since the banks determining the rate are all government-controlled. It also will exclude smaller lenders who might be more aggressive in lowering rates to win business.
Still, economists said the move marks a step toward making rates more market-driven and fostering greater competition among banks, pushing them to become more nimble in setting rates on loans and deposits without help from the central bank. The new rate will be calculated daily, for example, while the current benchmark rate on one-year loans was last changed in July last year.
"It's another push forward in China's lending rate liberalization," said Li Wei, economist at Standard Chartered Bank.
The central bank this past summer dropped its floor on bank lending rates. Advocates of financial reform will be closely watching a meeting of senior government officials set for sometime next month for hints of official attitudes about other potential reform moves, including removing a ceiling on bank deposit rates and developing a bank-insurance system to protect depositors. Both would be key toward China liberalizing its financial markets and dropping limits on money flowing over its borders.
On Friday, China Construction Bank Corp. (>> China Construction Bank Corporation), one of China's big four lenders, said it signed loan agreements totaling 550 million yuan ($90.4 million) with China Baoan Group Co. and Szitic Commercial Property Co. to offer one-year loans at the new rate.
The People's Bank of China said the rate would be calculated daily through an official price quotation system and be based on a weighted average of rates from nine domestic commercial banks on loans to their most favored customers.
The prime rate set on Friday was 5.71% on a one-year loan. That compares with 6% on the one-year benchmark rate.
"From a policy rate perspective, this could evolve into a more subtle guide to the benchmark lending rate," said Ken Peng of BNP Paribas.
Banks already have a way of gauging interbank lending rates using the Shanghai interbank offered rate or Shibor--China's answer to the London interbank offered rate. But that reflects only the cost of funds that banks lend to each other, not the cost of funds for their corporate customers.
In June, rates on that market shot up to 30% briefly for overnight funds as banks were caught in a cash squeeze, unable to match their short-term funding with long-term lending. That incident revealed problems at domestic banks in managing their own funding as well as dealing with market-driven interest rates, analysts said.
The central bank said the loan prime rate would be announced each working day through the Shibor website though it would continue setting its benchmark rate as a transitional phase to help encourage "rational" interest rates.
The central bank also said the loan would boost transparency, though it didn't disclose the weightings given to the interest rates reported by the nine banks.
The nine banks included in the rate-setting system are Industrial & Commercial Bank of China Ltd. (601398.SH, 1398.HK), Agricultural Bank of China Ltd. (1288.HK, 601288.SH), Bank of China Ltd. (3988.HK, 601988.SH), China Construction Bank Corp. (0939.HK, 601939.SH), Bank of Communications Co. (3328.HK, 601328.SH), China Citic Bank Corp. (0998.HK, 601998.SH), Shanghai Pudong Development Bank Co. (>> Shanghai Pudong Development Bank Co. Ltd), Industrial Bank Co. (>> Industrial Bank Co., Ltd.) and China Merchants Bank Co. (3968.HK, 600036.SH).
Smaller banks weren't completely thrilled with the new arrangement, however.
A bank official at Everbright Bank--not one of those contributing to the daily rate calculations--noted that smaller banks won't have a role in setting the rates. "They just have to follow the big banks."
Grace Zhu, Liyan Qi and Richard Silk contributed to this article.
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