(Yicai) July 24 -- China’s market-oriented reform of lending rates has entered a new phase after branches of Industrial and Commercial Bank of China, China Merchants Bank and Shanghai Pudong Development Bank issued the first batch of loans benchmarked against the Depository Institutions Repurchase Rate to corporate clients in southern Hainan province, introducing a new pricing anchor for the country’s lending rates.

The series of DR rates, published daily by the China Money Network, includes multiple maturities such as DR001 (overnight), DR007 (seven-day) and DR014 (14-day). Due to their stronger liquidity, shorter-tenor DR rates are expected to be the preferred benchmarks for loan pricing among lenders and borrowers.

The launch represents a major milestone in China’s interest rate liberalization drive, marking a significant step toward using DR, an interbank money market benchmark, as an anchor for credit market pricing.

The widely used Loan Prime Rate still carries some influence from regulatory guidance, said Dong Ximiao, chief economist at Zhaolian Finance and executive director of the Shanghai Finance and Development Laboratory. By contrast, DR rates more directly reflect actual supply and demand for funds as well as liquidity conditions within the banking system.

“Loans priced against DR benchmarks tie lending rates more closely with actual market financing costs,” Dong said.

The innovation by the three banks breaks the previous reliance on the LPR as the sole pricing anchor, fostering a more diversified interest rate transmission mechanism and helping improve transparency and flexibility in loan pricing.

The move could also encourage banks to strengthen asset-liability management and risk pricing capabilities, reducing the risk of mismatches caused by delays in policy rate adjustments, he added.

Leveraging the financial innovation policies of Hainan Free Trade Port, market participants can further explore ways to align the DR benchmark mechanism with internationally recognized money market benchmarks such as SOFR, enabling better support for cross-border businesses’ integrated onshore-offshore financing and interest rate risk management needs, Dong added.

China Merchants Bank said in a statement on its first DR-based loan issuance that DR rates can quickly reflect movements in interbank money market rates, enabling corporate clients to choose loan pricing benchmarks based on their financing needs and expectations for future rate trends.

Editors: Tang Shihua, Kim Taylor