Borrowing costs increase amid tighter liquidity and an overheating economy
Mainland banks have stopped extending discounted lending rates to their best customers amid tighter money-market liquidity and expectations of a rise in interest rates, effectively raising capital costs for many Chinese companies.
Since January, banks have been allowed to set interest rates within a fixed band near the 5.31 per cent base rate set by the People's Bank of China (PBOC). The band ranges from 4.78 per cent at the low end to a ceiling of 9.03 per cent.
In an increasingly competitive lending market, most banks had been willing to offer the minimum rate to their best customers to finance projects and developments. Local governments also lean on branches to lend at the lowest possible rate to favoured companies and infrastructure projects.
However, sources at China Minsheng Banking Corp and China Merchants Bank said yesterday that very few borrowers could now qualify for cheaper lending rates.
'We used to give our best customers borrowing more than 100 million yuan the preferential rate, but not now,' one banker said. 'Other banks have also stopped giving their best customers the best lending rate.'
The sources added that banks frequently charged 20 per cent to 30 per cent above the base rate in sectors where overheating was most pronounced, such as property development.
