China launches interest rate reform to reduce financing costs
Source:Global Times Published: 2019/8/18 12:36:40
The People's Bank of China (PBC), China's central bank, has improved a key interest rate mechanism, a move to reduce the financing costs which experts said is intended to boost the domestic economy amid downward pressure.
The PBC said that reform to the loan prime rate (LPR) mechanism will cause loan interest rates to edge down further, a representative from the PBC said Saturday.
Currently, most Chinese banks still refer to the benchmark lending rate when offering loans. This results in a relatively rigid situation and borrowers cannot benefit too much from falling market rates, according to the PBC representative.
The one-year central bank LPR is now 4.31 percent, compared with the PBC's one-year benchmark lending rate of 4.35 percent, PBC data showed.
"Starting now, all banks must mostly refer to the LPR when prescribing the lending rate of their new loans…banks cannot set implicit bottom lines of the LPR in any form," the PBC said in a statement it published on its official website on Saturday.
The new LPR quotations will be based on open market operation rates (mostly medium-term lending facility) and will be published by the national interbank funding center once every month starting Tuesday.
"Just relying on fiscal policies is not enough when the domestic economy is facing pressure from the trade war and weak demands. The government wants to cope with such downward pressure by adjusting the interest rate mechanism to better reflect market needs," Zhou Yu, director of international finance under the Shanghai Academy of Social Sciences, told the Global Times on Sunday.
"It also reflects China's financial reform direction - [to] marketization," Zhou said.
Statistics released by the National Bureau of Statistics showed that the domestic economy shrank in manufacturing, consumption and services sectors in July.
But Chen Ji, an economist at the financial research center under the Bank of Communications, cautioned that the new mechanism might add pressure to small- and medium-sized banks which, compared with large banks, have weaker pricing capabilities and are less able to attract good clients.
Chen said the LPR reform might cause liquidity or credit risks at those banks. Therefore, the government can diversify methods to allow some flexibility to those banks.
