China and LIBOR: Difference between pages

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Originally, but no longer, an acronym for “London Inter-Bank Offered Rate”, LIBOR is a formal benchmark interest rate.


{{Infobox
For actual rate series see [https://alfred.stlouisfed.org/category?cid=33003 LIBOR rates from 1986].
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|title        =
|above        = KEY COUNTRY FACTS
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==Definition of LIBOR==
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|image        = [[File:Flag_china.png|border|160px|alt=Flag_china.png]]
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|headerstyle  = background:#e9d7e0;
LIBOR gauges the all-in, simple interest rate (including credit premium and liquidity premium) for an unsecured short-term loan that large banks of good credit standing would in the run-up to 11 am each business morning, on request, expect to be offered by another similar institution and (since 1998) which it would accept. It is thus not, since 1998, an "offered rate" as such.
|labelstyle  = background:#e9d7e0;
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  |header1 =
#Formerly and informally a guess at the interest rate at which large banks of good credit standing might be expected to lend to other such banks in the London inter-bank short-term, unsecured money market at a particular time and in a particular currency. This usage is deprecated.
| label1 = System of government:
#Formally, LIBOR refers to a series of daily unsecured simple-interest-rate benchmarks in several currencies and maturities administered by ICE Benchmark Administration Limited (IBA) but prior to 1 February 2014 by the British Bankers’ Association (the BBA). LIBOR rates are representations of unsecured inter-bank term borrowing costs in the London market each morning. It thus goes without saying that an individual bank does not have its own “LIBOR”.
  |  data1 = one party state
|header2 =
| label2 = Population:
|  data2 = 1.36 billion
|header3 =
| label3 = Currency:
|  data3 = renminbi/yuan (CNY)
|header4 =
| label4 = FX regime:
|  data4 = managed float
|header5 =
| label5 = GDP:
|  data5 = US$9.33 trillion (2014)
|header6 =
| label6 = IGTA member:
|  data6 = yes
|header7 =
| label7 = FATF member:
|  data7 = yes
|header8 =
| label8 = Treasury association:
|  data8 = [http://www.igta.org/member-detail.php?id=31 International Association of CFOs and Corporate Treasurers (China)]
|header9 =
| label9 = Other professional financial/banking associations:
|  data9 = [http://www.sbacn.org Shanghai Banking Association]
[http://www.china-cba.net China Banking Association]


|belowstyle = background:#ddf;
LIBORs at summer 2014, were published by ICE Benchmarks for:  
|below      =
* CHF (Swiss Franc)
}}
* EUR (Euro)
* GBP (Pound Sterling)
* JPY (Japanese Yen)
* USD (US Dollar).


Australian dollar, Canadian dollar, Danish krone, New Zealand dollar and Swedish krona LIBOR rates were discontinued in early 2013.


LIBOR rates, other than possibly for UK Sterling, are offshore or Eurocurrency rates - rates at which funds may be raised in London, not in the financial centre in the country of origin of the currency concerned.


==Financial regulatory framework==
===Bank supervision===
The PBC was responsible for banking supervision until 2003. As part of a package of reforms designed to improve the stability of the Chinese banking system, the China Banking Regulatory Commission (CBRC) was set up to supervise banks and other financial institutions.
Alongside the CBRC are separate commissions regulating China’s securities market (China Securities Regulatory Commission) and insurance industry (China Insurance Regulatory Commission).
The State Administration of Foreign Exchange (SAFE), operating under the auspices of the PBC, manages China’s external debt and oversees the country’s exchange controls.


===Exchange controls===
Since 1 April 2013 the compilation and distribution of LIBOR rates has been a regulated activity under the UK’s Financial Conduct Authority (FCA). The FCA Handbook (MAR) covers Benchmarks (the first being LIBOR) in MAR 8, with requirements for submitters (MAR 8.2) and administrators (MAR 8.3). FCA approved persons, managed via its controlled functions regime manage rate submission by banks (CF 40) and calculation and corroboration of rates by the administrator (CF 50).  
The currency in China is the renminbi (RMB) and the currency unit is the yuan.
China continues to apply exchange controls, although there has been some relaxation in recent years. Companies are now permitted to keep foreign currency receipts and retain them in their current account according to their operational needs rather than within a quota.
Outward direct investment is permitted and there are no limits on the amount of foreign exchange that can be purchased for overseas investment. Companies are now permitted to pay initial expense costs with foreign currency, in advance of any direct outward foreign investment.
The restrictions on the number of banks permitted to provide RMB forward foreign exchange and non-RMB foreign exchange transactions have been relaxed.
Non-residents are permitted to establish entities in China, subject to approval from the Ministry of Commerce or the relevant local agency.
Any company in China is permitted to invest forward foreign exchange earnings in overseas branches, subject to approval from SAFE. This approval process is also being simplified in order to encourage greater overseas investment by domestic firms.  


==Taxation framework==
===Corporate income tax===
The Enterprise Income Tax Law (EITL) governs both foreign investment and domestic-funded enterprises under a single unified tax system.
The EITL taxes both domestic and foreign enterprises at a flat rate of 25%, with the same expense deduction criteria and available tax incentives.
The EITL has replaced most of the geographically oriented preferential tax treatment formerly available for foreign-invested manufacturing enterprises with a new tax incentive system that focuses on specific industries such as high-tech and new-tech industries. The new incentive system continues the incentives available for R&D activities carried out by enterprises, and extends to all qualified enterprises nationwide the tax preferential treatment that was previously available to qualified high-tech and new-tech enterprises located in special zones. The EITL provides a grandfather rule for enterprises that formerly benefited from certain preferential tax treatment, in the form of reduced enterprise income tax rates or enterprise income tax reduction/exemption with fixed terms.


===Taxation of dividends and interest===
Although the EITL provides for a 20% withholding tax, the rate is reduced to 10% under the implementation rules.
Chinese-sourced income (including dividends, interest, royalties and other payments derived by foreign enterprises without a permanent establishment in China or where the income generated is not effectively connected to the foreign enterprise’s establishment in China) is subject to withholding tax.
Dividends paid to a foreign investor or a foreign investment enterprise were formerly exempt from withholding tax, but the situation has changed under the EITL, with a 10% withholding income tax introduced. Specific guidance (Caishui [2008] No 1) further clarifies that the retained earnings of a foreign-invested enterprise accumulated up to 1 January 2008 that are distributed to its foreign investors in or after 2008 are still exempt from withholding tax. Profits newly created in 2008 and later years that are distributed to non-resident corporate investors are subject to a 10% withholding income tax unless a preferential treaty rate is available under a tax treaty (or a tax arrangement).


===Transfer pricing===
==The LIBOR Question==
Transactions between related parties must be carried out at arm’s length. The tax bureau can make adjustments (based on reasonable methods) to business transactions between an enterprise and its related parties that are not at arm’s length if they result in reduced taxable income for the enterprise or its related parties.
Since the introduction of the EITL, it was generally anticipated that the tax authorities would undertake more transfer pricing investigations. In particular, the EITL (and the STA Rules) specify that enterprises are generally required to submit a nine-form filing package detailing related-party transactions during the year in an appendix to their annual income tax return, and to provide relevant documentation when requested by the tax authorities during a tax audit. Failure to provide relevant information or to demonstrate compliance with the arm’s length principle can lead to a tax adjustment as well as interest on taxes charged as a result of the adjustment.
The STA Rules specify that contemporaneous documentation must be prepared by 31 May of the year following the tax year and maintained for ten years. Enterprises may be exempt from this requirement if certain conditions are met (e.g. the amount of annual related-party transactions does not reach the threshold specified in the STA Rules).
The EITL specifically endorses cost-sharing arrangements (CSAs) for the joint development or transfer of intangible assets, or the provision or receipt of services. However, according to the STA Rules, a CSA involving services is generally limited to group purchase and group marketing planning activities. All CSAs should be filed and approved by the State Administration of Taxation (SAT). During the course of a CSA, participants must file contemporaneous documentation with tax authorities before 20 June of the following year, for each taxable year.


===Thin capitalisation===
For each currency, a panel of banks contributes rates for use in calculating LIBOR. Each bank is asked, for each currency and maturity to which it contributes:
China imposes mandatory debt-to-equity ratios for foreign-invested enterprises, and the equity of a foreign-invested enterprise should be paid up within a stipulated time period.
The EITL has a thin capitalisation rule, which is further specified in specific rules (Caishui [2008] No 121): a debt-to-equity ratio of 2:1 for general enterprises and of 5:1 for financial enterprises. A deduction is not allowed for interest expenses incurred on any related-party debt investments exceeding these debt-to-equity ratios, unless the underlying transactions are in compliance with the arm’s length principle (demonstrated through contemporaneous documentation), or the interest expenses are payable to domestic-related parties subject to higher effective tax rates. The implementation rules of the EITL clarify that “debt investments” refers to arrangements where an enterprise has directly or indirectly acquired financing from related parties, and where the enterprise is required to repay the principal and make interest payments to the lending party (or any other form of compensation which is of an interest payment nature).


===Controlled foreign companies===
“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”
Under the CFC rule in the EITL, where an enterprise is “controlled” by enterprises resident in China or jointly “controlled” by Chinese resident enterprises and individual Chinese residents, is established in a country or region where the effective tax rate is significantly lower than 25% (the new tax rate under the EITL) and the CFC either does not distribute profits or distributes less profit than it should (without justification), then a portion of the CFC’s profits will be attributed to the Chinese resident enterprise and included in the latter’s taxable income in the current period.
The implementation rules further clarify that the term “significantly lower” than the effective tax rate of 25% means that the effective tax rate is less than half of the 25% tax rate. In addition, the term “controlled”, as cited above, includes: a resident enterprise or an individual resident of China directly or indirectly holding 10% or more of the total voting shares, and such resident enterprise(s) or individual resident(s) jointly holding more than 50% of the total shares of the foreign enterprise; and cases where the shareholding percentage of the resident enterprise(s) and individual resident(s) of China does not meet the percentage standard as stipulated above, but substantial control is formed over the foreign enterprise in respect of shareholding, financing, business, purchase and sales, etc.


===Capital gains tax===
Until 1998, the question was about hypothetical “prime” banks and asked for an "offered rate":
For resident companies with foreign investments, capital gains are taxed as part of a company’s taxable profits at the applicable corporation tax rate. Capital gains derived from the transfer of equity interest are calculated as the difference between the sale proceeds and the original cost of the investment. Specific guidance (Guoshuihan [2010] No 79) further clarifies that undistributed profits and other reserves of shareholders are included in the computation of capital gains.
Chinese-sourced gains derived by foreign companies from property transfer are generally subject to a 10% withholding income tax under the implementation rules of the EITL.
Specific guidance released by the SAT (Guoshuihan [2009] No 698) addresses the transfer of an equity interest by non-resident companies. It outlines reporting requirements and taxation guidelines for non-residents’ direct and indirect transfers of Chinese resident companies’ equity interests. A 10% withholding income tax will generally be imposed on the gains from the transfer of a Chinese resident company by a non-resident company unless an exemption is available under a tax treaty. Subject to the SAT’s approval, the tax authorities may disregard the existence of an offshore intermediary holding company and tax the transfer of its shares in China where the parties to the transaction are considered to have abused the legal form and conducted the transaction with a view to avoiding Chinese tax, without bona fide commercial purposes.


===Indirect taxes===
“At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11 am?”
VAT is generally levied on the sale of goods, the provision of repair and replacement services, and the importation of goods into China. The taxpayer will be responsible for output VAT based on taxable income, while the input VAT paid on the purchase of goods or services should be available as a credit to offset against output VAT. The standard VAT rate is 17%, but there is a reduced rate of 13% (for food grains, tap water, heating, natural gas, books, feeds, fertilisers). Generally export goods attract a zero rate of VAT.
The pilot VAT reform programme, which was launched in Shanghai on 1 January 2012 to move certain service industries from the scope of business tax to the scope of VAT, initially applies to the transportation and certain modern service industries (e.g. R&D and technology services, leasing of movable and tangible goods, etc). The VAT rates under the pilot programme are as follows:
* 17% for the leasing of moveable and tangible goods
* 11% for the transportation sector
* 6% for other services in the pilot scope.


As of 31 December 2012, the VAT pilot reform was extended to eight more localities in batches, including Beijing, Tianjin, Jiangsu, Zhejiang (including Ningbo), Anhui, Fujian (including Xiamen), Hubei, and Guangdong (including Shenzhen). During the Executive Meeting of the State Council on 10 April 2013, it was decided that the current pilot services will be rolled out nationwide as of 1 August 2013 and that the following three new service industries will be included within the scope of the reform:
The new question made the rates contributed more linked to each contributing bank – and so more easily subject to review, increasing banks’ accountability for their submissions but meant it was no longer no longer a pure "offered rate". (The "prime bank" approach is still taken by some other ~IBOR type rates around the world.)
* production, broadcasting and distribution of television and radio programmes and films;
* railway transportation; and
* postal and telecommunications.


The State Council also confirmed that the VAT reform will be fully rolled out by 1 January 2016. The pilot programme will be expanded to other service industries (e.g. financial and insurance services) when conditions permit.
In estimating its view of the answer to the LIBOR question, a bank takes account of its knowledge of transactions it has undertaken, its observation of third party transactions and indicative quotes by third parties in the same markets. Expert judgement has to be applied in adjusting observed rates that were not “just prior to 11 am”, or were in adjacent markets but not actually inter-bank deposits, not for institutions of same credit standing or were, for various reasons, not representative. In the extreme case, “In the absence of transaction data relating to a specific LIBOR benchmark, expert judgement alone, in adherence to the LIBOR definition, should be used to determine a submission” (See LIBOR Code of Conduct, below.)


''Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight 2014'' ([http://www.deloitte.com www.deloitte.com]).


==Accounting framework==
==LIBOR calculation==
===Key principles===
Chinese accounting standards are set by the China Accounting Standards Committee (CASC), which operates under the direction of the Ministry of Finance.
Chinese accounting standards follow the accrual basis of accounting.
In February 2006, China adopted a new basic accounting standard and 38 new Chinese Accounting Standards. The new Chinese accounting standards are broadly similar to International Financial Reporting Standards, although some differences remain.
These new standards become compulsory for listed enterprises from 1 January 2007. Other enterprises are encouraged to adopt them.
From the end of 2009, large and mid-scale companies operating in China, along with central level State-Owned Enterprises have had to adopt accounting standards that are in line with International Financial Reporting Standards (IFRS). These companies only make up around 1% of all business operating in China.


'''Accounting for financial instruments (derivatives and capital instruments)'''
For each of the currencies and periods, rates contributed are ranked and the average of the two middle quartiles of rates submitted is calculated and published. Because panel banks are chosen to represent the larger banks of repute active in London in each currency, LIBORs are not rates applicable to an “average bank” but represent a truncated average of highly regarded, large scale banks. So, many institutions may have to pay more for borrowing, a few less.
The Chinese approach to accounting for financial instruments is broadly similar to International Financial Reporting Standards. Unlike IAS39, the new Chinese Accounting Standards do not use the concept of embedded derivatives.


==Banking service provision==
Commercial banks operate according to the terms of the 1995 Commercial Bank Act.
China’s four largest banks are state-owned commercial banks. The Agricultural Bank of China, the Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China operate nationwide. Management in these banks is decentralised and each branch is responsible for pursuing its own commercial activities, which can create difficulties for companies seeking to manage cash across branches.
There are 12 joint-stock commercial banks operating in China. These are also state-owned banks offering a full range of banking services. On a regional level, there are 144 city commercial banks operating in distinct geographical areas and providing retail and corporate banking services. There are also 337 rural commercial banks, 800 village and township banks and 147 rural cooperative banks.
In 1994, the Agriculture Development Bank, Export and Import Bank of China and State Development Bank were established to provide specialist banking services.
Foreign banks have a growing presence in China. The banks have been permitted to offer foreign currency services since 2002, and since December 2006 they have been able to provide a full range of banking services to Chinese customers if they were locally incorporated. There are currently 41 locally incorporated foreign banks and 95 branches of foreign banks that had received approval to conduct RMB business in China.
Individual foreign investors are permitted to take a maximum 20% strategic stake in local banks, whereas the combined foreign shareholding limit is 25%.


==Clearing and payment systems==
==LIBOR Code of Conduct==
===Clearing systems===
China has five domestic currency clearing systems:
* The central bank-operated China National Advanced Payment System (CNAPS), which has two modules – the LVPS (a real-time gross settlement [RTGS] system for high-value and urgent payments), and the BEPS (a bulk payment system for low-value payments).
** China National Advanced Payment Systems – Large Value Payment System (CNAPS-LVPS): CNAPS-LVPS is a real-time gross settlement system operated by the People’s Bank of China (PBC). It is used for all electronic transfers with a minimum value of RMB 50,000 and for all electronic payments with a value above RMB 1m. At present, CNAPS covers over 800 cities in China. To have access to CNAPS, a bank must have a settlement account at a branch of the PBC.
** China National Advanced Payment Systems – Bulk Entry Payment System (CNAPS-BEPS): CNAPS-BEPS is used for electronic credit transfers with a value of less than RMB 50,000, and for pre-authorised collections and dated debits.
* The Local Clearing Houses which process and settle paper-based credit and debit payments. China has a network of local clearing houses, most of which are owned and operated by the PBC. The remainder are owned by the participant banks. Local clearing houses clear all paper-based credit and debit items, the overwhelming majority of which are cheques. There is no limit to the value of items processed in LCHs. Payment data can be submitted via electronic banking systems; although to be processed it must be supplied in a simplified Chinese format.
* The Cheque Imaging System (CIS) for the nationwide clearing of RMB-denominated cheques. It truncates paper-based cheques into electronic items for improved processing.
* The Super e-banking online payment clearing system. This allows real-time interbank transfers and account enquiries by linking up most commercial banks’ online banking systems. During 2012 the system was rolled out nationally and there were 120 financial institutions participating in the real-time system. Previously, interbank transfers made online via these institutions took between one and two days to clear.


The China Domestic Foreign Currency Payment System (CDFCPS) settles currency payments in eight international currencies (AUD, CAD, CHF, EUR, GBP, HKD, JPY and USD).
The Code, published by IBA and confirmed by the FCA as Industry Guidance, sets out or annexes the relevant governance and methodology [https://www.theice.com/publicdocs/IBA_Code_of_Conduct.pdf]. It does not yet cover the role of the Oversight Committee or of the appointment of contributing banks to panels. (See Early 21st century controversy, below.)


===Payments===
* '''''Cash''''' – is the most important payment instrument in the retail sector in China. In terms of non-cash payments, electronic credit transfers have become the most popular method of making payments in China by value. Electronic credit transfers and bank drafts are the main methods of making intercity payments. There has been a rapid increase in the use of cards as a means of payment, which now account for the vast majority of non-cash payments by volume.
* '''''Credit transfers (electronic payments)''''' – electronic credit transfers are an important method of making payments, especially in the large financial centres. Because of the difficulties with making inter-city cheques, electronic credit transfers are important for inter-city payments.
*  '''''Direct debits''''' – direct debits are becoming available in China, although their use remains low. Direct debits are usually used for paying utility bills and making insurance payments.
* '''''Card payments''''' – at the end of 2013 there were approximately 3.8 billion debit cards and 391 million credit cards in circulation. The vast majority of bank card holders are based in China’s major cities; the 2012 national average of 0.25 cards per person in China rises to 1.16 cards per person in Shanghai and 1.47 cards per person in Beijing. Since 2011 the PBC has been promoting the issuing and use of IC-based bank cards in China. These are chip-embedded smart cards, which as well as being used for normal payment card services, can be loaded with applications to receive government services such as social insurance. China UnionPay (CUP), launched in 2002 by the government and co-owned by card issuers, is a single nationwide acceptance and settlement system for all credit and debit cards in China.
* '''''Cheques''''' – in 2013, 667 million cheques with a value of RMB 259.6 trillion were processed in China, a decrease of 11.7% in volume and 3.4% in value on the previous year. Company cheques must be signed by hand and stamped with the official company mark to be valid. Cheques are only valid for ten days. Cheques have been primarily used for intra-city payments because of the absence of a national cheque clearing system. However, the introduction of the National Cheque Image Exchange System (CIS) in 2007 has reduced clearing times to as little as three days.
* '''''Electronic money''''' – there has been a limited adoption of electronic money schemes in China. Pre-paid cards are used for high-volume, low-value transactions. To date, electronic money is available in the larger cities to pay for specific items, such as public transport in Shanghai.
* '''''Cross border''''' – cross-border transactions are settled via correspondent bank networks. The major banks have direct SWIFT connections. Some banks also issue foreign currency bank drafts.


==Cash and bank account management==
==History==
===Account availability===
Residents are permitted to open and maintain domestic (RMB) bank accounts. Subject to regulatory approval, resident legal entities may maintain foreign currency accounts in China. Residents may also open foreign currency accounts abroad, but must first gain approval from SAFE.
Non-resident companies are permitted to hold currency accounts in China, denominated in domestic (RMB) and foreign currency. RMB accounts can only be held outside China by non-residents if they are RMB settlement accounts. Only banks qualified by the PBC can offer these accounts.


===Money laundering===
The term LIBOR seems to have been first contractually defined in 1970 - for use in relation to what was probably the first Euro-currency (US dollar) floating rate note.<ref>Remarks to John Grout, Policy and Technical Director of the Association of Corporate Treasurers, August 2014, by David Clark, Chairman of the [[Wholesale Markets Brokers' Association]], who worked in 1970 for BTI, worked on the transaction and was present at the signing and has approved citation here.</ref> This note was organised by Bankers Trust International in London for the Italian oil company ENEL. "LIBOR" had been used informally from the late 1960s to refer to inter-bank rates in London.  
China has implemented anti-money laundering legislation (Articles 191, 312 and 349 of the Criminal Code of 1997; Rules for Anti-Money Laundering by Financial Institutions of 2003; Regulations on Anti-Money Laundering for Financial Institutions of 2003; Law of the People’s Republic of China on Anti-Money Laundering of 2006; Regulations on Real Name System for Individual Savings Accounts of 2006; Rules for Anti-Money Laundering by Financial Institutions of 2006; Administrative Rules for Reporting of Large-Value and Suspicious Transactions [entered into force March 2007]; Rules on Reporting Suspicious Transactions for Terrorist Financing by Financial Institutions 2007 and Administrative Rules for Financial Institutions on Customer Identity Verification and Record Keeping of Customer Identity and Transaction Information and Decision of the Standing Committee of the National People’s Congress on Strengthening Counter-Terrorism Work 2011. Further AML Rules were issued in December 2012).
China is a member of the Eurasian Regional Group on Combating Money Laundering and Financing of Terrorism (EAG) and is a member of the Financial Action Task Force (FATF).
China has established a financial intelligence unit (FIU), which is housed within the People’s Bank of China (PBC). The FIU is split into two operational units namely, the Chinese Anti-Money Laundering Monitoring and Analysis Centre (CAMLMAC) and the Anti-Money Laundering Bureau (AMLB).


''Supplied by BCL Burton Copeland (www.bcl.com). Data as at January 2014.''
In the mid-1980s the BBA and other parties including the Bank of England established working parties that developed  the BBA standard for Interest Rate Swaps, “BBAIRS terms”. These provided for the fixing of BBA Interest Settlement Rates that eventually developed into bbalibor™ - LIBOR. BBAIRS terms became standard market practice in 1985. BBA LIBOR rates were published from 1 January 1986, some trial rates having been calculated since 1984.


===Cash concentration===
LIBOR availability eased the further growth of the syndicated loans market and the development of financial instruments such as forward rate agreements and swaps which also required a standardised interest rate benchmark.
Cash concentration is a liquidity management capability whereby account balances are physically transferred to/from a single account (known as a master, header or concentration account) for liquidity management purposes. Cash concentration can take these forms:
* '''''Zero balancing (ZBA)''''' – sometimes referred to as sweeping, zero balancing is a cash concentration capability whereby the total of all account balances is physically transferred into a nominated account.
* '''''Target balancing''''' – also known as sweeping, target balancing is a cash concentration capability similar to ZBA, whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts.
* '''''Threshold balancing''''' – a cash concentration capability similar to ZBA, whereby the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-account balances reach a predetermined threshold.


Direct inter-company loans are not permitted in China and transactions between group entities can only occur if there is an underlying transaction between the entities. The restrictions on the free flow of foreign exchange into and out of China and between the capital and settlement accounts make cash concentration difficult, particularly for multiple entities. To allow domestic currency cash concentration to take place, companies can use an entrustment loan (EL) agreement. Under such an agreement, a domestic bank or China-registered group financial company acts as an intermediary by transferring funds between the participating entities. The EL structure requires SAFE approval. Because it is not a standard structure, care must be taken when establishing the structure.
On 1 April 2013, both compilation and distribution of LIBOR rates and contribution of rates for use in compiling LIBOR rates became regulated activities under the UK’s Financial Conduct Authority (FCA). (See above.)
For non-residents, qualified multinational companies have also been permitted to concentrate foreign currency cash via the entrustment loan structure under the terms of the 2005 Pudong measures. Foreign currency funds and domestic currency funds (approved by SAFE) can also be concentrated to offshore banking units.


===Cross border cash concentration===
On 1 February 2014, the BBA was replaced as Administrator of LIBOR by ICE Benchmark Administration Limited (IBA). IBA made no immediate changes to the LIBOR process following its take over but it became primary publisher of the rates, taking over from Thomson Reuters. IBA took over from Thomson Reuters (Exeter England) in undertaking the collection, real-time surveillance and calculation services, later in 2014. [[https://www.theice.com/iba.jhtml]]
For residents, cross-border payments are only normally permitted for trade-related transactions with supporting documentation. However, some banks now offer automated cross-border sweeping of physical cash pools. Under the terms of the Pudong measures, non-residents qualified as multinational companies are able to manage payments to and from an overseas parent company, as long as this is explicitly authorised by the Chinese-based entities. Funds can also be concentrated to offshore banking units.  
Since 2012, the PBC and SAFE have started to permit some entities based in Beijing and Shanghai to automate cross-border sweeping and inter-company lending. This is subject to prior approval and strict transaction limits.


===Notional pooling===
Notional pooling is offered in local currency (RMB) and foreign currency by domestic and foreign banks in China, although it is subject to various SAFE and PBC restrictions. Notional pooling is not offered between multiple entities.


===Electronic and internet banking===
In late 2014, IBA published a consultation [https://www.theice.com/publicdocs/ICE_LIBOR_Position_Paper.pdf] in the form of a Position Paper on the Evolution of ICE LIBOR that proposed a number of changes to LIBOR. A second Paper and consultation followed during 2015. At the end of 2015 the IBA published a feedback statement on the consultation. Further evolution is expected.
The use of electronic banking and internet banking is growing rapidly in China. At present, use is concentrated in the larger cities, although the PBC is encouraging local banks to invest in electronic banking capability. There is no nationwide electronic banking standard, but some banks allow their customers to submit bulk electronic payment files through ERP systems.
There has been a growth in the availability of internet banking as the PBC authorises more banks to offer it. Both domestic and approved foreign banks are now permitted to offer internet banking in China. China has the world’s highest number of internet users with around 538 million users in mid 2012. However, this represents less than half the population, at around 40.1%. Of these users, an estimated 39.2% used online banking facilities at the beginning of 2013. The China Financial Certification Authority has developed a certificate system, which banks use to demonstrate their site’s encryption.


==Liquidity management==
===Short-term investments===
Short-term investments include:
* '''''Treasury bills''''' – these may only be purchased by Qualified Foreign Institutional Investors.
* '''''Repurchase agreements (repos)''''' – available using corporate and government bonds as security. Repos are not available to foreign-invested enterprises.
* '''''Demand deposits''''' – available in local and foreign currency. The PBC sets a maximum interest rate for RMB-denominated deposits and for USD-denominated deposits with a value of less than US$3m. USD-denominated deposits with a value in excess of US$3m are not subject to any PBC-set interest rate ceiling.
* '''''Term deposits''''' - As with demand deposits, the PBC sets a maximum interest rate for RMB-denominated deposits and for USD-denominated deposits with a value of less than US$3m. Maximum rates are set for RMB deposits for one week, one, three and six months, and one year. Maximum rates are set for relevant USD deposits for three and six months, and one and two years.
* '''''Commercial paper''''' - Rates are often higher than the ceilings imposed on deposits by the PBC, making commercial paper an attractive short-term investment instrument. Commercial paper cannot be purchased by foreign-invested enterprises.


Money market funds are available in China.
==Early 21st century: controversy==


===Short-term borrowing===
During the early stages of the global financial crisis that followed the 2008 collapse of Lehman Brothers, concerns began to be raised about the good faith of rates contributed by banks.  
Borrowing instruments include:
* Bank funding. Overdrafts, temporary advances (for up to three months) and revolving lines of credit (for up to one year) are available from local banks. Chinese banks issue loans subject to the General Rules on Loans issued by the PBC. This applies to loans offered to both local and foreign-invested enterprises. Interest rates are set by the PBC reference rates. Foreign banks do not have to comply with the same lending rules as domestic banks. Many companies prefer to arrange bank funding through Hong Kong as it is subject to fewer restrictions and the rates are typically lower.
* Discounted trade bills. Bills of exchange are discounted by local and foreign banks.
* Commercial paper can be issued, although the lack of a secondary market reduces its attractiveness to investors. Commercial paper issued in China is not available to foreign-invested entities.  


==Corporate finance==
The suggestions were twofold:
===Capital markets===
Mainland China’s two stock markets are the Shanghai and Shenzhen exchanges. A-shares (denominated in RMB) can be sold to local investors and Qualified Foreign Institutional Investors. B-shares (denominated in USD in Shanghai and HKD in Shenzhen) can be sold to foreigners and local investors with foreign currency accounts.
Securities transactions are regulated by the China Securities Regulatory Commission.


===Risk management instruments===
*that bank staff running interest-rate-affected positions tried to influence rate contributions up or down to suit their own books and/or
Foreign exchange risk management instruments are subject to exchange controls applied by SAFE. The use of non-delivery forwards is the most common method of hedging foreign exchange risk. Swaps are only permitted for non-local currency pairs. Bond forwards can be traded to hedge interest rate risk.


* following the collapse of Lehman Brothers in 2008, banks tried to disguise the market’s falling confidence in the banks’ individual credit standing by submitting lower rates than the actual at which they were being offered and accepting funds.


==Websites==
Enquiries in the US and the UK and other countries resulted in administrative action against some banks and criminal action against one bank subsidiary and some individuals.
'''Government website'''
* [http://www.china.org.cn/english http://www.china.org.cn/english]
'''People’s Bank of China'''
* [http://www.pbc.gov.cn/english http://www.pbc.gov.cn/english]
'''China Banking Regulatory Commission'''
* [http://www.cbrc.gov.cn http://www.cbrc.gov.cn]
'''China Securities Regulatory Commission'''
* [http://www.csrc.gov.cn http://www.csrc.gov.cn]
'''State Administration of Foreign Exchange'''
* [http://www.safe.gov.cn http://www.safe.gov.cn]
'''State Administration of Taxation'''
* [http://www.chinatax.gov.cn http://www.chinatax.gov.cn (Chinese language)]
'''Ministry of Finance'''
* [http://www.mof.gov.cn http://www.mof.gov.cn]
'''Ministry of Commerce of the People’s Republic of China'''
* [http://www.english.mofcom.gov.cn http://www.english.mofcom.gov.cn]
'''National Bureau of Statistics of China'''
* [http://www.stats.gov.cn/english http://www.stats.gov.cn/english]
'''International Chamber of Commerce'''
* [http://www.china.com http://www.china.com]
'''China Council for the Promotion of International Trade'''
* [http://www.ccpit.org http://www.ccpit.org]
'''Shanghai stock exchange'''
* [http://www.sse.com.cn http://www.sse.com.cn]
'''Shenzhen stock exchange'''
* [http://www.szse.cn/main/en http://www.szse.cn/main/en]


[[Category:Book_Export]]
On 2 April 2013, UK secondary legislation came into force amending the Regulated Activities Order (RAO), making “the administering of, and providing information to, specified benchmarks” a regulated activity under the FSMA (the UK’s Financial Services and Markets Act 2000 as amended). Initially, the only benchmark specified is BBA LIBOR (now ICE LIBOR). The approach to regulation is set out in a Policy Statement PS13/6 [http://www.fsa.gov.uk/static/pubs/policy/ps13-06.pdf] of the UK’s Financial Services Authority (FSA) the predecessor of the Financial Conduct Authority (FCA) that took on its responsibilities in April 2013.
 
In 2013 the FCA approved a Code of Conduct for Contributing Banks to LIBOR as Industry Guidance [https://www.theice.com/publicdocs/IBA_Code_of_Conduct.pdf] and changed the Administrator from the original published by the BBA, [http://www.bbalibor.com/download/9070]. The code sets out or annexes the internal governance, audit, compliance, submission methodology and so on required of banks contributing rates.
 
In August 2014, the Fair and Effective Markets Review of HM Treasury, the Bank of England and the Financial conduct Authority recommended that other [[FICC]] benchmarks be brought under the RAO, namely [[SONIA]], [[RONIA]], [[ISDAFIX]], WM/Reuters 4 pm London Closing Spot Rate, London Gold Fixing, LBMA Silver Price and ICE Brent.
 
 
== See also ==
* [[ARRc]]
* [[ICE LIBOR]]
* [[Base rate]]
* [[CertFMM]]
* [[Cost-plus loan pricing]]
* [[Day count conventions]]
* [[Effective annual rate]]
* [[EURIBOR]]
* [[euro LIBOR]]
* [[Eurocredit]]
* [[Financial Conduct Authority]]
* [[FRAND]]
* [[Floating rate note]]
* [[Forward rate agreement]]
* [[LIMEAN]]
* [[LIBID]]
* [[London InterBank Offered Rate]]
* [[New York Funding Rate]]
* [[Reference rate]]
* [[Simple interest]]
* [[TIBOR]]
* [[Total return swap]]
 
 
==Other links==
 
[https://alfred.stlouisfed.org/category?cid=33003 LIBOR rates from 1986 on, including for discontinued rates] (Available from the Archival Economic Data maintained by the St. Louis Federal Reserve Bank (ALFRED) - select LIBOR Rates from Categories.)
 
[http://www.treasurers.org/icelibor Briefing note: LIBOR Administrator change to ICE Benchmarks from BBA LIBOR, January 2014]
 
[http://www.treasurers.org/node/9062 Apple Inc. sheds light on Libor, John Grout, ACT May 2013]
 
[http://www.treasurers.org/node/8064 Libor: Waiting for Wheatley..., John Grout, ACT 2012]
 
 
==References==
 
<references/>
 
[[Category:Context_of_treasury]]
[[Category:Long_term_funding]]
[[Category:Manage_risks]]
[[Category:Treasury_operations]]

Revision as of 21:03, 22 June 2016

Originally, but no longer, an acronym for “London Inter-Bank Offered Rate”, LIBOR is a formal benchmark interest rate.

For actual rate series see LIBOR rates from 1986.


Definition of LIBOR

LIBOR gauges the all-in, simple interest rate (including credit premium and liquidity premium) for an unsecured short-term loan that large banks of good credit standing would in the run-up to 11 am each business morning, on request, expect to be offered by another similar institution and (since 1998) which it would accept. It is thus not, since 1998, an "offered rate" as such.

  1. Formerly and informally a guess at the interest rate at which large banks of good credit standing might be expected to lend to other such banks in the London inter-bank short-term, unsecured money market at a particular time and in a particular currency. This usage is deprecated.
  2. Formally, LIBOR refers to a series of daily unsecured simple-interest-rate benchmarks in several currencies and maturities administered by ICE Benchmark Administration Limited (IBA) but prior to 1 February 2014 by the British Bankers’ Association (the BBA). LIBOR rates are representations of unsecured inter-bank term borrowing costs in the London market each morning. It thus goes without saying that an individual bank does not have its own “LIBOR”.

LIBORs at summer 2014, were published by ICE Benchmarks for:

  • CHF (Swiss Franc)
  • EUR (Euro)
  • GBP (Pound Sterling)
  • JPY (Japanese Yen)
  • USD (US Dollar).

Australian dollar, Canadian dollar, Danish krone, New Zealand dollar and Swedish krona LIBOR rates were discontinued in early 2013.

LIBOR rates, other than possibly for UK Sterling, are offshore or Eurocurrency rates - rates at which funds may be raised in London, not in the financial centre in the country of origin of the currency concerned.


Since 1 April 2013 the compilation and distribution of LIBOR rates has been a regulated activity under the UK’s Financial Conduct Authority (FCA). The FCA Handbook (MAR) covers Benchmarks (the first being LIBOR) in MAR 8, with requirements for submitters (MAR 8.2) and administrators (MAR 8.3). FCA approved persons, managed via its controlled functions regime manage rate submission by banks (CF 40) and calculation and corroboration of rates by the administrator (CF 50).


The LIBOR Question

For each currency, a panel of banks contributes rates for use in calculating LIBOR. Each bank is asked, for each currency and maturity to which it contributes:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

Until 1998, the question was about hypothetical “prime” banks and asked for an "offered rate":

“At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11 am?”

The new question made the rates contributed more linked to each contributing bank – and so more easily subject to review, increasing banks’ accountability for their submissions but meant it was no longer no longer a pure "offered rate". (The "prime bank" approach is still taken by some other ~IBOR type rates around the world.)

In estimating its view of the answer to the LIBOR question, a bank takes account of its knowledge of transactions it has undertaken, its observation of third party transactions and indicative quotes by third parties in the same markets. Expert judgement has to be applied in adjusting observed rates that were not “just prior to 11 am”, or were in adjacent markets but not actually inter-bank deposits, not for institutions of same credit standing or were, for various reasons, not representative. In the extreme case, “In the absence of transaction data relating to a specific LIBOR benchmark, expert judgement alone, in adherence to the LIBOR definition, should be used to determine a submission” (See LIBOR Code of Conduct, below.)


LIBOR calculation

For each of the currencies and periods, rates contributed are ranked and the average of the two middle quartiles of rates submitted is calculated and published. Because panel banks are chosen to represent the larger banks of repute active in London in each currency, LIBORs are not rates applicable to an “average bank” but represent a truncated average of highly regarded, large scale banks. So, many institutions may have to pay more for borrowing, a few less.


LIBOR Code of Conduct

The Code, published by IBA and confirmed by the FCA as Industry Guidance, sets out or annexes the relevant governance and methodology [1]. It does not yet cover the role of the Oversight Committee or of the appointment of contributing banks to panels. (See Early 21st century controversy, below.)


History

The term LIBOR seems to have been first contractually defined in 1970 - for use in relation to what was probably the first Euro-currency (US dollar) floating rate note.[1] This note was organised by Bankers Trust International in London for the Italian oil company ENEL. "LIBOR" had been used informally from the late 1960s to refer to inter-bank rates in London.

In the mid-1980s the BBA and other parties including the Bank of England established working parties that developed the BBA standard for Interest Rate Swaps, “BBAIRS terms”. These provided for the fixing of BBA Interest Settlement Rates that eventually developed into bbalibor™ - LIBOR. BBAIRS terms became standard market practice in 1985. BBA LIBOR rates were published from 1 January 1986, some trial rates having been calculated since 1984.

LIBOR availability eased the further growth of the syndicated loans market and the development of financial instruments such as forward rate agreements and swaps which also required a standardised interest rate benchmark.

On 1 April 2013, both compilation and distribution of LIBOR rates and contribution of rates for use in compiling LIBOR rates became regulated activities under the UK’s Financial Conduct Authority (FCA). (See above.)

On 1 February 2014, the BBA was replaced as Administrator of LIBOR by ICE Benchmark Administration Limited (IBA). IBA made no immediate changes to the LIBOR process following its take over but it became primary publisher of the rates, taking over from Thomson Reuters. IBA took over from Thomson Reuters (Exeter England) in undertaking the collection, real-time surveillance and calculation services, later in 2014. [[2]]


In late 2014, IBA published a consultation [3] in the form of a Position Paper on the Evolution of ICE LIBOR that proposed a number of changes to LIBOR. A second Paper and consultation followed during 2015. At the end of 2015 the IBA published a feedback statement on the consultation. Further evolution is expected.


Early 21st century: controversy

During the early stages of the global financial crisis that followed the 2008 collapse of Lehman Brothers, concerns began to be raised about the good faith of rates contributed by banks.

The suggestions were twofold:

  • that bank staff running interest-rate-affected positions tried to influence rate contributions up or down to suit their own books and/or
  • following the collapse of Lehman Brothers in 2008, banks tried to disguise the market’s falling confidence in the banks’ individual credit standing by submitting lower rates than the actual at which they were being offered and accepting funds.

Enquiries in the US and the UK and other countries resulted in administrative action against some banks and criminal action against one bank subsidiary and some individuals.

On 2 April 2013, UK secondary legislation came into force amending the Regulated Activities Order (RAO), making “the administering of, and providing information to, specified benchmarks” a regulated activity under the FSMA (the UK’s Financial Services and Markets Act 2000 as amended). Initially, the only benchmark specified is BBA LIBOR (now ICE LIBOR). The approach to regulation is set out in a Policy Statement PS13/6 [4] of the UK’s Financial Services Authority (FSA) the predecessor of the Financial Conduct Authority (FCA) that took on its responsibilities in April 2013.

In 2013 the FCA approved a Code of Conduct for Contributing Banks to LIBOR as Industry Guidance [5] and changed the Administrator from the original published by the BBA, [6]. The code sets out or annexes the internal governance, audit, compliance, submission methodology and so on required of banks contributing rates.

In August 2014, the Fair and Effective Markets Review of HM Treasury, the Bank of England and the Financial conduct Authority recommended that other FICC benchmarks be brought under the RAO, namely SONIA, RONIA, ISDAFIX, WM/Reuters 4 pm London Closing Spot Rate, London Gold Fixing, LBMA Silver Price and ICE Brent.


See also


Other links

LIBOR rates from 1986 on, including for discontinued rates (Available from the Archival Economic Data maintained by the St. Louis Federal Reserve Bank (ALFRED) - select LIBOR Rates from Categories.)

Briefing note: LIBOR Administrator change to ICE Benchmarks from BBA LIBOR, January 2014

Apple Inc. sheds light on Libor, John Grout, ACT May 2013

Libor: Waiting for Wheatley..., John Grout, ACT 2012


References

  1. ↑ Remarks to John Grout, Policy and Technical Director of the Association of Corporate Treasurers, August 2014, by David Clark, Chairman of the Wholesale Markets Brokers' Association, who worked in 1970 for BTI, worked on the transaction and was present at the signing and has approved citation here.
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