This article first appeared on GuruFocus .
Three major Chinese banks have started testing a new loan-pricing system that could better reflect changing liquidity and funding costs across the financial market. Industrial & Commercial Bank of China, one of China's largest commercial lenders, China Merchants Bank ( CIHHF ), a Chinese commercial bank, and Shanghai Pudong Development Bank's Haikou branch each issued their first loans this week using interbank repurchase agreement rates as the benchmark. The transactions mark a departure from the loan prime rate, which has served as the main reference for commercial loan pricing since the People's Bank of China introduced its reform in 2019. The banks said the move was designed to support a more diversified benchmark system rather than relying on a single pricing reference.
The new approach could give lenders more flexibility at a time when borrowing demand from businesses and households remains weak. Interbank rates and bond yields have declined more rapidly than the loan prime rate in recent years, raising concerns that the existing benchmark may no longer fully represent banks' actual funding costs. The loan prime rate has remained unchanged since the central bank's last reduction in May 2025, while nearly half of the loans issued in March were priced below it, compared with only 16% in 2019. This divergence suggests banks may increasingly use repo rates alongside the loan prime rate to price different types of credit rather than abandoning the existing benchmark entirely.
Industrial & Commercial Bank of China issued a one-year loan worth 76.7 million yuan, or about $11.3 million, to a foreign company and linked it to the overnight repo rate. Shanghai Pudong Development Bank provided 7 million yuan to a state-owned enterprise, while state media reported that China Merchants Bank issued an 8 million-yuan loan. Because interbank repo rates are based on daily transactions between financial institutions using bonds as collateral, they may offer a more direct measure of short-term borrowing costs and banking-system liquidity. Investors may view the trial as another step toward a more market-oriented interest-rate framework after the People's Bank of China introduced a new overnight liquidity tool last month and discussed the benefits of diversified loan benchmarks in its May monetary policy report.
