The People’s Republic of China (PRC) is in the process of simplifying what was once an extremely complex interest rate structure. Liberalization has reduced the number of interest rate categories of the People’s Bank of China (PBC), the PRC central bank, to 34 from 200. Also, the PRC now operates an established money market where the cost of money, particularly for interbank transactions, is determined by supply and demand.

Rediscount Rate

The PBC rediscount facility allows banks to exchange commercial paper and other debt instruments with the central bank at a discount, thus offering cheaper access to funds.

In 2004, the PBC introduced “floating rate” rediscount lending, which allows it to set the discount rate without having to seek State Council permission for each adjustment.

Interbank Rates

China Interbank Offered Rates (CHIBOR)

Since 1996, financial institutions have been allowed to fix interest rates for interbank lending and borrowing. Interbank lending terms vary from overnight to 4 months. The PBC allows tenors exceeding 4 months to be negotiated between counterparties.

The CHIBOR system is based on actual traded rates on interbank deals, with the 7-day tenor as the benchmark. The rates, however, have failed to provide a benchmark useful to the market given the thin trading volume of interbank funding activities.

Shanghai Interbank Offered Rates (Shibor)

Shibor is set daily based on the average interbank offered rates of 16 banks, with tenors ranging from overnight to one year. Launched in January 2007, the rate is seen as a more market-sensitive benchmark for the interbank market than CHIBOR, being based on quoted rates rather than on actual traded rates.

The National Interbank Funding Center is authorized to calculate and release Shibor rates through www.shibor.org.

Repurchase Rates

A repurchase agreement (Repo) is a commitment by the seller (dealer) to buy back a security from the purchaser (customer) at a specified price at a designated future date.

Since 1997, repo rates in the PRC have been market-determined. The seven-day repo is widely accepted as a benchmark rate for interbank transactions, including borrowing/lending and interest rate swaps, along with the PBC’s deposit and lending rates.

Deposit and Lending Rates

The 1995 Central Bank Law grants the PBC full autonomy in regulating monetary instruments, including setting interest rates for commercial banks. The State Council oversees PBC policies.

The PBC, with approval from the State Council, sets base interest rates for the entire banking system, including nonbank financial institutions. A Monetary Policy Committee acts as a consultative body for the formulation of monetary policy by the central bank. This is composed of the PBC’s Governor and two Deputy Governors, a Deputy Secretary-General of the State Council, a Vice Minister of the State Development and Reform Commission, a Vice Finance Minister, the Administrator of the State Administration of Foreign Exchange, the Chairman of China Banking Regulatory Commission, the Chairman of China Securities Regulatory Commission, the Chairman of China Insurance Regulatory Commission, the Commissioner of National Bureau of Statistics, the President of the China Association of Banks and an expert from the academia.

At present, the PBC sets 34 categories of interest rates but normally uses the one-year deposit rate as a benchmark against which other rates are determined. It likewise defines a floor lending rate for commercial banks, which is currently at 90% of the benchmark rate. Only lending by rural and urban credit cooperatives is given a ceiling, presently at 230% of the PBC benchmark.

Liberalization of foreign currency interest rates preceded that of domestic rates. In 2000, the PBC allowed domestic banks to set individual foreign-currency deposit and lending rates for amounts up to US$3 million. In 2002, the central bank unified the foreign currency interest rate policies for domestic and foreign financial institutions.