Information about Asia and the Pacific Asia y el Pacífico

8 Basic Outline for the National Interbank Market in Renminbi

Hassanali Mehran, Marc Quintyn, and Bernard Laurens
Published Date:
December 1996
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Information about Asia and the Pacific Asia y el Pacífico
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China’s interbank market has begun to take shape since it was initiated in the mid-1980s. However, it still has a long way to go by comparison with interbank markets of the developed countries. It is still unable to meet the requirements for uniform, orderly, and highly efficient fund-raising in China’s socialist market economy. Therefore, we have developed a basic outline for a national interbank market in renminbi based on the experiences of Japan, Italy, and Turkey, while taking into account the Chinese reality.

Setting Up a Unified National Trading Network

A unified national trading network for interbank transactions could be composed of two levels: a primary network and a secondary network. The participants of the primary network would be the headquarters of those commercial banks that were so authorized by the People’s Bank of China (PBC), 35 financing centers,1 and a few national trust and investment companies. Participants would conduct trading using the computer facilities provided by the China Foreign Exchange Trade System (CFETS).2 The surplus and insufficiency of renminbi funds among bank head offices, as well as between all provinces and bank head offices, would all be adjusted through this network.

The secondary network would mainly be supported by the 35 financing centers and would be located in 35 provinces, cities, or autonomies. The participants in the secondary network would include those commercial bank branches and sub-branches at the prefecture and municipal level and above that were authorized by the head office; trust and investment companies; urban cooperative banks; urban credit cooperatives; financial leasing companies; and financing companies with a current account at the PBC.

Any cross-border transactions would have to be traded through the local financing center. That is, the financing center would either be the counterpart of each transaction or, as a broker, be responsible for verifying the required documentation.

Setting Up a Unified National Operational Network

The renminbi interbank market would share some of the features of the foreign exchange market. First, the participants of the secondary market would net off their position internally, that is, among the branches of each member bank or among the other financial institutions within a financing center. Then participants, according to demand and supply in the market, would convey the offer/bid to the primary market through computer terminals, with all quotations appearing on computer screens immediately. Next, the borrower/lender would choose each other, agree on the conditions of a deal, and issue instructions to settle the transactions.

Renminbi interbank market trading would differ from foreign exchange trading in the following respects:

1. Price formation. Instead of price matching by the CFETS, as is the case in the exchange market, price formation in the renminbi interbank market would result from a direct confrontation between individual lenders and borrowers. Before concluding the transaction, the lender would ensure that the counterpart had not exceeded its credit line and was not overdue on any past loans.

2. Settlement arrangement. In the renminbi interbank market, the settlement would occur on the same day or one day after the conclusion of a transaction. The settlement risk would be borne by the counterparts and not by the CFETS.

3. Mode of operation. On the agreed transaction date, the primary market and secondary market would operate in tandem. That is, the financial centers would continuously receive quotations on the lending and borrowing of financial institutions within a province, balance them on the spot, balance differences in the secondary network, and relay to the primary network all trading information, including the names of the banks concluding transactions, amounts, time limits, and interest rates. During the trading process, financial centers would not only transmit to the primary network the quotations of financial institutions in the same province, but they would also transmit to the participants within the province all primary network quotations to ensure that the primary network and secondary network interest rates were generally in line.

The interbank market would differentiate bank participants from nonbank participants in terms of both mode of operation and maturity of borrowing/lending. For loans between commercial banks, a 20-day time limit would usually apply, while for borrowing by nonbanking institutions, the limit would usually be seven days. In order to reduce credit risk, treasury bills or financial bonds issued by policy banks could be required as collateral for large transactions.

The short/long position in the branches of commercial banks at the county level and below that were not authorized to trade in the primary market would be centralized by the provincial or municipal branch, which would net off on behalf of those branches. The net intrabranch or intracity position might be channeled to the invisible market, for transactions of up to seven days.

Advantages of a Unified National Renminbi Interbank Market

Based on the above measures, an impartial, specific, and efficient interbank market would be established. This market would have the following advantages compared with the current practice.

1. It would help improve efficiency in the use of funds, terminate the segmentation of the money market, and facilitate the rapid circulation and rational allocation of funds.

2. It would help regularize short-term lending behavior. The main participants would negotiate loans on an open network according to uniform rules, thereby improving transparency. This would not only benefit central bank oversight, but also help the establishment of self-supervisory mechanisms among participants.

3. It would facilitate the macroeconomic management by the central bank through indirect monetary policy instruments, and enhance the role of the interbank market in the conduct of monetary policy.

4. It would support interest rate liberalization. Indeed, the experience of numerous foreign countries suggests that interest rate deregulation usually begins with the interbank market.

1The financing centers are entities that were set up to organize and operate the interbank market at the provincial level. Eds.
2The CFETS is a centralized trading system that also provides for the settlement of foreign exchange transactions on a net basis. Eds.

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