US dollar interest under international sales of goods contracts

In a contract for international sales of goods, the seller and buyer may agree on using the US dollar as settlement currency. When a payment dispute arises in connection with contract performance, usually the claimant claims arrears and loss of interest against the respondent. The outstanding principal amount can be claimed in the agreed currency, such as US dollars. As for the overdue interest, according to relevant stipulations it needs to be calculated based on the RMB benchmark lending rate for the same term, as published by the People’s Bank of China (PBOC), if there is no mutual agreement on how overdue interest should be calculated. However, does the RMB benchmark lending rate apply if the principal is denominated in US dollars or any other foreign currency?

Having reviewed dozens of PRC judicial cases, the authors found that about 60% are of the opinion that the PBOC’s US dollar lending rate for the same term must apply to calculation of interest loss on occasions where the outstanding arrears are US dollar-denominated. So then, how is this US dollar lending rate determined?

Regulations of the PBOC concerning US dollar lending rate. According to the General Provisions on Loans, interest must accrue on loans periodically according to the PBOC’s regulations concerning accrual of interest. Moreover, with approval from the State Council, the PBOC has announced that, since 21 September 2000, the interest rate, accrual and settlement of interest on foreign currency loans must be determined by financial institutions in line with the prevailing interest rates of international financial markets, as well as their own capital costs, risk differences and other appropriate factors. That is to say, the PBOC has given financial institutions the discretion to fix the interest rate for their US dollar loans. The authors have consulted the PBOC’s headquarters in Shanghai about this issue and learned that the interest rate of specific US dollar loans is indeed fixed by commercial lenders at their discretion.