Economic Observer reporter Lao Yingying

From July 21st to July 22nd, Industrial and Commercial Bank of China Hainan Branch, China Merchants Bank Haikou Branch, and Shanghai Pudong Development Bank Haikou Branch announced that they have recently launched three DR (Deposit Financial Institution Bond Repurchase Rate) benchmark interest rate loans in Hainan. This business covers different account types, different ownership enterprises, and different interest calculation models, marking the official landing of the first DR benchmark interest rate loan business in China.

The DR benchmark interest rate is a market-based interest rate formed by interbank pledged repo transactions, which is entirely generated by market transactions and can reflect the liquidity situation and changes in funding supply and demand of the banking system in a more authentic manner. According to international experience, the DR benchmark interest rate is one of the anchors of diversified loan benchmark interest rates, often used for pricing loans to large enterprises.

The reporter learned from the interview that continuously promoting the shift of loan interest rates from a single pricing benchmark to a diversified pricing benchmark system is an important measure in the process of interest rate marketization reform. As a market-oriented interest rate that can timely reflect the market conditions of money market funds, DR can complement LPR (Loan Market Quotation Rate). Enterprises can flexibly choose suitable loan pricing benchmarks based on their own operating conditions and predictions of interest rate trends. At the same time, the DR interest rate, as the actual transaction rate in the market, also facilitates enterprises to use various tools to manage financing interest rate risks effectively.

How to operate DR benchmark interest rate loan

On July 21, ICBC's WeChat official account released an article saying that recently, ICBC successfully landed the first DR benchmark interest rate loan in China in Hainan Free Trade Port, and granted a 1-year EF account (multi-functional free trade account) interval floating DR loan of 76.7 million yuan to a foreign-funded enterprise to meet the diversified financing needs of enterprises such as foreign trade.

On July 22, the "CMB WeChat Journal" WeChat official account published an article saying that China Merchants Bank successfully landed the first floating rate loan with DR001 (overnight repo weighted average interest rate) as the pricing benchmark in Hainan Free Trade Port, and granted DR benchmark loans to a state-owned enterprise and a local private enterprise.

On July 22, the WeChat official account of Haikou Branch of Shanghai Pudong Development Bank published an article saying that recently, Haikou Branch of Shanghai Pudong Development Bank has granted a fixed interest rate DR loan of 7 million yuan to a central enterprise, whose business covers diversified financing needs such as daily business of enterprises, initially demonstrating the adaptability of DR benchmark interest rate in the real economy financing scenario.

The pilot banks mentioned above stated that Hainan Free Trade Port has the advantages of gathering cross-border business entities, a relatively mature EF account system, and rich financial opening scenarios, which are suitable for exploring innovative applications of DR benchmark interest rate loans. The first batch of loans corresponds to different types of enterprises, covering diverse financing needs such as foreign trade, infrastructure, and central enterprises.

For the process of releasing the first DR loan, the pilot banks stated that they have sorted and improved each link around DR pricing rules, contract text revision, system parameter transformation, customer adaptation, and risk management, and completed supporting construction such as quotation mechanism, interest arrangement, and loan approval. Through pre communication, list reserve, and scenario screening, they have provided cross-border business entities with financing options that are closer to market capital prices.

A person in charge of credit business at the Haikou branch of the pilot joint-stock commercial bank mentioned above told the Economic Observer that this policy is currently being piloted on a small scale and has not been widely promoted yet. In the past, loans were uniformly priced using the LPR pricing benchmark, while the DR pricing benchmark and LPR belong to two different pricing systems. Traditional LPR pricing, once the loan approval determines the execution interest rate, the loan interest rate cannot be changed; Using the DR pricing benchmark, the interest rate determined during loan approval may not necessarily be the final execution rate. Because for enterprises, withdrawals may not necessarily be made immediately upon approval, which can result in differences in interest rates between the approval date and the withdrawal date. The first withdrawal will be based on the average DR of the month before the withdrawal date, and then the execution interest rate for that withdrawal will be determined by adding or subtracting basis points from the average.

The above-mentioned credit business personnel further stated that for enterprises, generally, withdrawals will not be fully withdrawn at once, but will be divided into multiple withdrawals. The monthly average DR corresponding to different withdrawal time points will be different, and the execution interest rates of multiple loans will also vary. In addition, he also emphasized that DR pricing is just another loan pricing mechanism different from LPR pricing, and the logic and entry threshold of loans have not changed.

Dong Ximiao, Chief Economist of Zhaopin, told Economic Observer that although LPR has been linked to the 7-day reverse repo rate, shortening the policy transmission chain, its essence is still a pricing mechanism of "policy rate+spread", with a window guidance color; DR directly reflects the real supply and demand of funds and the tightness of liquidity in the interbank market. Introducing DR into loan pricing means that loan interest rates are linked to the actual financing costs in the market for the first time.

The above-mentioned credit business personnel also stated that the DR interest rate is in line with the market-oriented capital market and is more suitable for large enterprises, enterprises sensitive to market interest rate fluctuations, or cross-border operations. However, the advantages and disadvantages of floating interest rates coexist, and under changes in market conditions, the final execution rate may be higher or lower than the execution rate under the LPR benchmark interest rate pricing.

The significance of launching DR benchmark interest rate loans

In 2020, the People's Bank of China released a white paper titled "Participating in International Benchmark Interest Rate Reform and Improving China's Benchmark Interest Rate System". The white paper proposes to further cultivate an interbank benchmark interest rate system represented by DR.

The white paper states that overall, China's benchmark interest rate system is relatively sound. However, except for LPR, which is widely used for loan interest rate pricing, other benchmark interest rates mainly serve as indicators reflecting market capital supply and demand. The direct use of LPR as a pricing benchmark for financial products is still relatively limited. The focus of the next step in the construction of China's benchmark interest rate system is to promote the widespread use of these benchmark interest rates. Among them, due to the fact that DR can fully reflect the liquidity situation and financing interest rate level of the banking system, it has a high market recognition and is closest to the international new benchmark interest rate RFRs (retrospective overnight interest rates based on real transactions). In the future, the focus will be on innovating and expanding the application of DR in financial products, making it a key reference indicator for China's monetary policy regulation and financial market pricing.

The white paper also mentioned that specific cultivation measures include encouraging the issuance of floating rate bonds based on DR and related interest rates, promoting interest rate swap transactions based on FDR (Interbank Repurchase Fixed Rate) as the floating end reference, encouraging financial institutions to conduct interbank business based on DR, encouraging international organizations to use DR as the benchmark for RMB interest calculation, and researching the construction of short-term DR based term interest rates.

Wang Pengbo, Chief Analyst of Broadcom Consulting, told reporters that the concentrated landing of multiple types of DR benchmark interest rate loans not only relies on the advantages of the free trade port account system and cross-border scenarios to complete product pilot projects, but also creates replicable landing samples for domestic interest rate marketization. This can not only improve the efficiency of bank interest rate transmission and internal pricing, but also provide financing solutions that are in line with market fluctuations for real cross-border enterprises. In the future, it is expected to continue to enrich DR linked credit products and strengthen the ability of free trade port financial services to the real economy.

In Dong Ximiao's view, the launch of DR benchmark interest rate loan business has broken the fixed price anchor of LPR and formed a diversified transmission chain of "short-term policy interest rate market interest rate loan interest rate", enhancing pricing transparency and flexibility; At the same time, promote banks to enhance their asset liability management and risk pricing capabilities, and avoid risk mismatches caused by lagging policy interest rates. In addition, providing institutional testing grounds for financial innovation in free trade ports and exploring ways to align with internationally recognized benchmark interest rates such as SOFR (Guaranteed Overnight Financing Rate).

Dong Ximiao also stated that in the initial stage, it is necessary to be alert to the possibility of unstable credit costs caused by large fluctuations in DR. In the long run, this complements the reform of the LPR pricing mechanism and helps to further unblock the transmission bottlenecks of monetary policy, allowing fund prices to truly reflect changes in market interest rates. This is an important practice of financial supply side reform.

A macro analyst from a joint-stock commercial bank told reporters that there are loan product forms such as fixed interest rates, floating interest rates, and range floating that are linked to the DR benchmark interest rate. Interest rate risk hedging tools and supporting services are expected to be further improved. Therefore, this product can improve the refinement level of enterprise fund management and create favorable conditions for subsequent interest rate risk management and hedging arrangements.

Dong Ximiao emphasized that for banks, DR dynamically matches the cost of liabilities and asset returns, but daytime fluctuations force banks to enhance their proactive management capabilities such as FTP (fund transfer pricing) and derivative hedging, making it more difficult to manage interest spreads. Especially for small and medium-sized banks, the pressure of interest spread fluctuations is greater due to the lack of tools. For high-quality enterprises, promoting DR pricing loans can help reduce financing costs, but for small and medium-sized private enterprises, due to the expansion of credit risk compensation, actual costs may increase instead of decreasing. In the long run, promoting DR pricing loans and diversifying credit market pricing will help improve the efficiency of fund allocation.