Chinese banks test repo-linked corporate loans to make pricing more market-based

Lenders are shifting loan benchmarks to short-term market rates, which analysts say heightens volatility and tests risk controls The shift to the overnight or seven-day depository-institutions repo rate (DR) from the monthly-released loan prime rate (LPR) follows Beijing’s June decision to change lending benchmarks to better reflect market conditions. Bank of China, one of the nation’s biggest state-controlled lenders, has rolled out DR-linked corporate loans in Shanghai, Ningbo in eastern China’s Zhejiang province, and in the southeastern Fujian, northern Hebei and central Henan provinces, according to the lender’s online statement. “DR makes loan pricing more sensitive to short-term funding conditions, but it also exposes banks to greater interest-rate volatility,” said Zhang Lin, chief macro researcher at Beijing-headquartered Far East Credit Research Institute.

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