* New prime rate to guide bank lending for customers
* Nine banks to set daily benchmark rate
* Part of broader rate reforms, immediate impact seen
(Adds economist comment, restructures)
BEIJING/SHANGHAI, Oct 25 China launched a new
benchmark lending rate on Friday in another step towards letting
markets set the cost of funds and reducing distortions that have
led to excessive investment and overcapacity now dogging the
world's second-largest economy.
The "loan prime rate," will guide commercial bankers in
setting interest rates when lending to their best customers, the
country's central bank said.
China has been gradually moving away from rate controls in
favour of a market-driven system and in July abolished all
controls on bank lending rates.
However, it maintains a ceiling on deposit rates, seen as
the most critical step Beijing needs to take to let market
forces take over and introduce more competition to the banking
sector, which is dominated by big state-owned institutions.
"I think this is a major logical step following a series of
moves toward liberalised interest rates," said Qu Hongbin, China
economist with HSBC in Hong Kong.
He said that since China eliminated the cap on lending
rates, and along with that the official base rate for bank
lending, commercial banks have been asking for a guidance rate.
"The middle sized banks are saying, 'How do I know what I
should charge my customers now?' I hear many regional banks in
China are asking for this since they removed the cap."
The move shows the People's Bank of China (PBOC) wants to
use the new benchmark as a non-binding and more market-based
tool, traders said.
"The loan prime rate is aimed at further promoting
market-oriented interest rates, improving the benchmark rate
systems and guiding the pricing of credit market products," the
PBOC said in a statement published on its website.
The rate reform is part of a broad reform agenda China's new
leadership is expected to outline at a key policy meeting next
month, promising to steer the economy from its reliance on
debt-fuelled investment to a more balanced model driven more by
consumption, services and innovation.
"As the new benchmark is based on banks' lending to their
best clients, it will actually serve as the floor for bank
loans," said a trader at a Chinese commercial bank in Shanghai.
The new rate, which only has a one-year tenor, was set by
nine commercial banks including China's four biggest banks and
was quoted for the first time on Friday at 5.71 percent.
While the central bank has been gradually laying the
groundwork for a market-based system it has also used its
day-to-day liquidity operations to rein in soaring credit and
what it considered excessive risk taking.
After engineering a cash crunch in late June and letting
funds flow back into the financial system in the following
months, the central bank allowed cash to drain for two
consecutive weeks, driving money rates to their highest since
the June squeeze.
China launched the SHIBOR system in 2007 modeled
after the London Interbank Offered Rate (LIBOR), hoping to
develop it into China's benchmark rate for the interbank system
where banks lend to one another, though concerns over big
influence of top banks have slowed the market's development.
The SHIBOR is now based on quotes supplied from around 20
market makers for their lending to financial institutions in the
interbank market and has been used in pricing debt issues.
But up to now China did not have a market-based benchmark
for loans to corporate clients.
Economists have long identified China's financial system,
where dominant state banks have been taking advantage of
controls to secure cheap funds and funnel them to big
state-owned enterprises, as one of key factors behind imbalances
that have accumulated during three decades of breakneck growth.
The rate will be announced every working day by China's
Shanghai-based interbank market and supplement the existing
Shanghai Interbank Offered Rate (SHIBOR), the statement said.
HSBC's Qu said that while experience with the interbank
market suggested the new rate could be subject to some
distortions, it was not a major worry because it would serve a
"The (new) primary rate is not a rate you must obey, it's
just a reference. It's market determined, not managed."
The banks involved in quoting the rate are: Industrial and
Commercial Bank of China (ICBC) , China
Construction Bank , Agricultural Bank of
China , Bank Of China
, Bank of Communications ,
Citic Bank <0998.HK > Shanghai Pudong Development
Bank, China Merchants Bank and
(Reporting by Aileen Wang and Koh Gui Qing in Beijing and Lu
Jianxin in Shanghai, Additional reporting by Pete Sweeney in
Shanghai; Editing by Jacqueline Wong)