China has taken further steps to push market-oriented interest
rate reform and develop a benchmark interest rate system for the
money market.
Industry observers applauded the introduction of the Shanghai
Interbank Offered Rate (Shibor), which lays the foundation for
evolution of the country's money policy to achieve macro-control
indirectly via adjusting the benchmark interest rate, rather than
the current approach of maneuvering the money supply.
But they noted that it will still take time for Shibor to exert
its influence, and acceptance and involvement by more financial
institutions is necessary to make it a real benchmark interest
rate.
The scarcity of a market-oriented benchmark interest rate has
been a shackle on the country's financial market.
The central bank currently uses one-year deposit and lending
rates as the benchmark, but since adjustments are infrequent the
rates fail to reflect market changes in a timely manner.
After a trial run of more than a month, the People's Bank of
China on January 4 put forward Shibor in a move to develop a more
market-sensitive benchmark for the interbank market.
There are eight Shibor rates, with maturities ranging from
overnight to a year. These are fixed according to calculations from
the rates quoted by 16 banks, eliminating the two highest rates and
the two lowest, and then averaging the remaining 12.
Deutsche Bank, HSBC and Standard Chartered are the three foreign
banks contributing quotes to Shibor.
"The launch of Shibor will further push forward the
market-oriented interest rate reform and develop a benchmark
interest rate system for China's money market," the central bank
said.
The bank is also hopeful the rate will help "improve the pricing
capabilities of financial institutions and guide the pricing of
money market instruments".
"The formation of a benchmark interest rate is the precondition
to make the interest rate market-oriented," said Yuan Dejun, senior
economist with China Galaxy Securities.
"Since the opening-up and reform of 1978, the central bank has
made huge efforts to promote market-oriented interest rate reform
and develop a benchmark interest rate system for China's money
market," he said.
"But due to their shortcomings, current indexes cannot become
real benchmark interest rates," he added.
Presently there are only two major reference rates in the market
the seven-day weighted average interest rate for repurchasing
treasury bonds and the rate for one-year central bank bills.
The new benchmarks provide a sound barometer for judging whether
liquidity in China's money market is reasonable.
What's more, the new rates create realistic conditions for the
alteration of money policy adjustment, Yuan said.
"In recent years, the money policy in our country relied on the
adjustment of banks' loan scale and money supply, while giving
insufficient play to tools such as the interest and exchange
rates," he said.
But thanks to the launch of Shibor and the potential to develop
it into a market-sensitive benchmark, the central bank would have a
new means of exerting indirect adjustments.
It could rely on an open market operation to realize the change
in benchmark rates, so as to influence the rates level in the whole
market, Yuan added.
The new rate will aid the development of the interest rate
derivatives market.
Some analysts proposed that the central bank strengthen the
importance of Shibor so dealers would accept it, but others
expressed concern that China's credit environment could endanger
the success of the benchmark.
"Interbank lending is mainly credit loans, so the promotion of
Shibor is a great test of China's feeble financial credit system,"
an analyst with Fudan University told.
(China Daily January 16, 2007)