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) 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.
The PBC rediscount facility allows banks to exchange commercial paper and other debt instruments with the central bank at a discount, which offers cheaper access to funds. In 2004, PBC introduced floating-rate rediscount lending, which allows it to set the discount rate without having to seek State Council permission for each adjustment.
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. 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.
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, which is based on quoted rates rather than actual traded rates. The National Interbank Funding Center is authorized to calculate and release SHIBOR rates.
A repurchase (repo) agreement 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 and lending, and interest rate swaps, along with the PBC’s deposit and lending rates.
Deposit and Lending Rates
The 1995 Central Bank Law grants PBC full autonomy in regulating monetary instruments, including setting interest rates for commercial banks. The State Council oversees PBC policies. 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.
At present, 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 also 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, which is presently at 230% of the PBC benchmark.
Liberalization of foreign currency interest rates preceded that of domestic rates. In 2000, PBC allowed domestic banks to set individual foreign-currency deposit and lending rates for amounts up to USD3 million. In 2002, PBC unified the foreign currency interest rate policies for domestic and foreign financial institutions.
China Government Securities Depository Trust & Clearing Co. (CDC) publishes the China Bond Composite Index, which is made up of 15 sub-indices. The data are not yet available in English. The China Foreign Exchange Trade Center & National Interbank Funding Center (CFETC/NIFC) has launched an Interbank Bond Index composed of 2 sub-indices: the Interbank Treasury Bond Index and the Interbank Composite Bond Index.
The Shanghai Stock Exchange also has two indices: a Corporate Bond Index and a Treasury Bond Index. Daily charts of these indices are linked below. The Bank of China publishes its own series of bond indices. Information on these can be accessed through the links below. The China Aggregate Bond Index is composed of treasury, agency, and corporate bonds. Lehman Brothers and Xinhua Finance launched this index in March 2004.