CHINA - The first batch of cross-border yuan loans agreements were signed on Monday after the central government approved the Qianhai area in Shenzhen to test a freer yuan before it becomes a global reserve currency.
A total of 15 lenders, including HSBC Holdings Plc and Industrial & Commercial Bank of China (Asia) Ltd, signed agreements to extend about 2 billion yuan (S$393 million) of cross-border loans to companies in the Qianhai district of Shenzhen.
Qianhai is a $45 billion (S$8.8 billion) "mini-Hong Kong" project approved in June to test, among other things, freer yuan use and capital account convertibility. One of the preferable policies in Qianhai is for companies to borrow from banks in Hong Kong, with terms and interest rates to be set independently.
The signing on Monday marks the first time that yuan loans will not be extended according to benchmark lending rates set by the central bank. Interest of the loans will be set freely by borrowers and lenders, but the loans must fund projects from government-approved industries.
Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB, wrote in a research note: "We see this as a major development in testing interest rate liberalization, which will subsequently be allowed in the whole mainland."
Interest rate liberalization has been on the forefront of China's financial reform in recent years, as many economists believe that a government-managed interest-rate system stalls growth by misallocating financial resources. In a show of the government's determination to reform the system, the central bank last year for the first time allowed lenders to float their rates around the benchmark.
"The 2 billion (yuan) amount is not so big. But what is big is that the government for the first time is taking a hand-off approach and allowing lenders and borrowers to make their deals," said Wang Jianhui, chief economist with Southwest Securities Co Ltd.
The one-year lending rate is around 6 per cent at the onshore market and 4 per cent in Hong Kong, giving Hong Kong lenders an edge over their mainland counterparts. But Wang shrugged off worries that opening a channel would reduce the pool of yuan deposits in Hong Kong.