Interest rates to rise in China as PBOC lifts interbank rate

February 6, 2017

SINGAPORE - The decision last week by China to edge up the interbank rate by 10 basis points to 2.35% is a “very clear signal” by the Chinese central bank that it will introduce short-term rates as benchmarks for bank lending rates, according to Iris Pang, senior economist at Natixis. She told ATI that Chinese banks previously have used deposit and lending rates as their benchmark.

 “This is a very important move,” says Pang. “It is not about increasing interest rates to discourage corporates from overleveraging.”
Pang says that, following the latest move, smaller banks especially will be forced to lift their lending rates on business loans and mortgages.
 She says: “When banks quote their interest rate in facility letters to customers, most are still using the old system of a one-year benchmark rate, implying that they will enjoy a flat rate, but if the banks follow the interbank rate, borrowers will face a higher rate.
 She expects banks to progressively start to rely on interbank or treasury rates to quote lending rates to customers. “When this happens, the interest rate liberalisation process will be complete.”
 Banks will feel the heat now she says,  because the interbank is higher and will force them to abandon their “old style” benchmark for pricing rates.
 “I believe some banks, especially smaller banks, will be forced to change their way of pricing loans because they have to borrow from the interbank market. In future, they will switch to quoting rates based on the repo (repurchase) and treasury rates very soon.”
  “We see this as progression towards RMB internationalisation. But this is not the end (of the road).
 “Another reason for the PBOC move last week was to counteract capital outflows by closing the interest rate differential between China and  the U.S.”