context: Since May 2015, all foreign currency deposit and lending rates have been decided by market mechanisms. The People's Bank of China stopped providing a unified rate, resulting in diverging standards in local courts on how to calculate late interest payments when foreign and SAR currencies are involved. Creditors were compensated inconsistently. The Supreme People’s Court released an official reply to the issue on 13 February, designating clear criteria to decide on which lending rates to adopt.
The SPC (Supreme People’s Court) Judicial Committee passed the reply on calculation standards for overdue payment interest of foreign and Hong Kong, Macao and Taiwan currencies in its 1,933th meeting, notes All Bright (Guangzhou) Law Offices.
According to the reply, if parties have agreed on an overdue interest rate, it should be calculated as per the argument. The rate agreed upon, nonetheless, should not exceed the upper limit stipulated by the PRC, SAR or foreign laws related to the dispute
- mainland China: shall not exceed four times the one-year loan market quoted interest rate published by the National Interbank Funding Centre
- Hong Kong: an annual interest rate of over 48 percent is considered high, exceeding 60 percent results in a criminal offence
- Macau: the statutory interest limit (usually 29.25 percent) is three times the statutory interest rate (usually determined as 9.75 percent)
- Japan: the upper limit of interest rates is linked to the amount lent
- below 100,000 yen: 20 percent
- 100,000 to 1 million yen: 18 percent
- 1 million yen: 15 percent
- UK: for exceeding payments, the interest rate could be set to 8 percent above the Bank of England base rate
If the parties have not fixated upon a specific interest rate for calculating overdue payments, they ought to settle according to their currency type. For instance, US dollars will be settled based on the average lending rates on the People's Bank of China official website.
The reply helps to allow a more precise design of terms and conditions. Enterprises that engage in cross-border transactions could now monitor interest rate data released by central banks and financial institutions, choosing an appropriate rate for settling liquidated damages. If the chosen rate could fluctuate within a short period, one could opt to
- calculate the settling rate based on the average interest rate during the overdue period
- choose a more stable currency pricing or interest rate
Lawyers and relevant parties ought to check for the upper limit of rates permitted according to the laws of each country before setting the terms, avoiding a rate too high that makes their claims invalid.
The reply also terminated the practice of converting foreign currency back to RMB for calculation purposes, avoiding equity damage caused by exchange rate fluctuations.