Chinese Central Bank Calls for Dumping of LIBOR, Commits to Further Interest Rate Reforms

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The People’s Bank of China (PBOC) has called for the dumping of the London Interbank Offered Rate (LIBOR) as the benchmark for pricing of dollar-denominated loans, while also reiterating its broader commitment to ongoing reform of the Chinese interest rate regime.

PBOC held its work meeting on the “Market Interest Rate Pricing Self-disciplinary Mechanism”(市场利率定价自律机制) in Beijing on 1 June.

The meeting called for “actively driving financial institutions to switch from the US dollar LIBOR” as a benchmark for the pricing of dollar-denominated loans, amidst moves by UK regulators to also abandon use of the benchmark due to its susceptibility to manipulation by the cohort of quoting institutions.

PBOC has instead permitted Chinese banks to shift from LIBOR to use of the Secured Overnight Refinancing Rate (SOFR), a rate based on repo market transactions that is recommended by the Alternative Reference Rates Committee in the US as a LIBOR alternative.

The meeting also called for “continuing to employ the key role of the interest rate self-disciplinary mechanism…optimizing regulation of deposit interest rates, strengthening self-disciplinary management of deposit rates, and guiding financial institutions to independently and rationally engage in pricing.”

Zeng Gang (曾刚), deputy-chair of China’s National Institution for Finance & Development (NIFD), said to PBOC’s official news outlet that the move presages efforts to reduce borrowing costs and further drive funds towards the real economy.

“Looking at the contents of the meeting, optimisation of the regulation of deposit rates is a key focal point, and the core is driving reductions in the financing costs of the real economy,” said Zeng.

“At present bank loan rates are markedly declining, but because of the influence of factors such as competition for deposits, the problem of rigid costs for bank deposits remains prominent.

“Following ongoing reform of deposit regulation by financial authorities, there has been large-scale rectification of principal-protected wealth management products, structured deposits and Internet deposits.

“This series of measures is in actuality to stabilise the cost of bank deposit funds, and thus consolidate declines in the real interest rates for loans and create an excellent financial environment for the real economy.”

Chinese financial authorities have stepped up efforts to reform the country’s interest rate regime since the start of last year.

PBOC issued the “People’s Bank of China Notice Concerning Strengthening Deposit Rate Regulation” (中国人民银行关于加强存款利率管理的通知) in March 2020, while at the start of 2021 the “Government Work Report” (政府工作报告) called for “optimising deposit interest rate regulation, driving further declines in real lending rates, and continuing to guide the financial system in transferring profits to the real economy.”

Net interest margins for Chinese commercial banks have continued to narrow however, contracting by 10 basis points at the end of 2020 compared to the start of that year.

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