Nevertheless, a special feature of the PRC government and quasi government bond pricing mechanism is these bonds are priced as a premium over the equivalent maturity bank deposit rates. While the auction system permits a more accurate pricing of capital, the government still sets deposit rates and lending rates, thus ensuring a comfortable margin for the banking sector. Mark Bucknall, Global Head of Debt Capital Markets for HSBC Group points out that although Chibor is the official rate for interbank borrowings in the domestic money market, it is however thwarted by a lack of transaction volume, and is therefore not a good indicator of the true cost of funds. Conceptually one can visualise the PRC banking system as having two classes of citizens, the large and the small institutions. The large institutions comprise the Industrial and Commercial Bank of China, the Agricultural Bank of China, Bank of China and the China Construction Bank.
Small institutions comprise city commercial banks and co-operative banks.
The large banks have implicit government guarantees and are in an active mode of commercialization, but the situation with the smaller banks is not clear given their lack of capital and expertise. Indeed, eventually some of the weaker institutions may be allowed to fail. During this ongoing transition period, the large institutions either trade amongst themselves and avoid the smaller ones, or price themselves out altogether. As a result, Chibor as a benchmark becomes weakened because it thus reflects the average of a small sample of widely differing rates. While the banks are big buyers of government bonds, the market overall suffers from banks being restricted to the interbank bond market.