China's one-year loan prime rate falls to 4.25 pct

22 Août, 2019, 13:27 | Auteur: Auguste Feret
  • The Beijing headquarters of the People's Bank of China

China lowered its new lending reference rate slightly on Tuesday, as expected, as the central bank kicked off interest rate reforms created to reduce corporate borrowing costs in the world's second-largest economy.

China's National Interbank Funding Center announced on Tuesday that the one-year loan prime rate (LPR) came in at 4.25 percent, the first pricing after the country made a decision to reform the lending rate mechanism.

The one-year LPR announced Tuesday was lower than the 4.31-percent rate from the previous mechanism, and also lower than the 4.35-percent benchmark lending rate. It was ten basis points lower than the PBOC's benchmark one-year lending rate. PBOC said the national interbank funding center will be authorized to publish the rate starting August 20.

Assuming LPR is 25 basis points lower, it will cut net profits at the banks by about 3.7%, they said, adding that Ping An Bank and China Everbright Bank will be among the most affected.

As the new LPR will be linked to rates set during open market operations, namely the PBOC's medium-term lending facility (MLF), investors will closely watch any changes in the borrowing costs that the central bank charges its liquidity tool.

"The move will push banks to lower lending rates and reduce borrowing costs for small and micro businesses", said Liu Guoqiang, vice governor of the People's Bank of China, at a press conference on Tuesday.

Some market participants expect the central bank to cut the interest rate on one-year MLF, as that could essentially bring the LPR down further.

The People's Bank of China (PBOC) debuted its new loan prime rates (LPR) under a new mechanism that was unveiled over the weekend. They also use the LPR as the benchmark for setting floating lending rates.

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To safeguard against LPR abuse, PBOC said it will strengthen its supervision on banks' rate quotations and punish banks for irregularities that disrupt the market. It has stayed near 4.3% - nearly the same as the one-year benchmark lending rate of 4.35%. The weighted average lending rate for companies and home buyers was 5.66 per cent in the second quarter.

"To all intents and purposes it is a "stealth" easing policy", brokerage Jefferies wrote in a note.

Over the past few years, PBOC has kept promising to gradually unify two interest rate tracks, which are its new market-based rates and its benchmark bank deposit and lending rates.

The new LPRs will be disclosed at 9:30 a.m. on the 20th day of each month.

Some analysts expect that the PBOC will "soon" cut the MLF rates as its next move to lower loan rates.

Wen Bin, chief economist at Minsheng Bank in Beijing, expected reductions in MLF rates to come next month. This page provides the latest reported value for - China Interest Rate - plus previous releases, historical high and low, short-term forecast and long-term prediction, economic calendar, survey consensus and news.

It was also meant to better reflect market demand for funds than the benchmark the PBOC sets.

However, many Chinese banks continue to favour state-backed companies over smaller firms which are considered higher credit risks, especially in times of economic weakness.

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