A new benchmark interest rate Chinese banks will need to use to set lending rates will be linked to the central bank’s medium-term liquidity facility, a People’s Bank of China policy adviser told state media on Monday.
China’s central bank unveiled a key interest rate reform on Saturday to help steer borrowing costs lower for companies and support a slowing economy that has been hurt by a trade war with the United States.
“Through the reform, it is clearly required that the banks’ lending rates should be linked to the LPR (loan prime rate), and the LPR should be linked to the MLF (medium-term lending facility) interest rate, thus establishing a relatively smooth transmission mechanism,” Ma Jun said in remarks published on the website of state radio.
“In the future, if the policy interest rate falls, the loan interest rate will also fall, which will help to reduce the financing cost of enterprises.”
Under the PBOC’s changes, banks must set rates on new loans using the new LPR as the benchmark for floating lending rates rather than the PBOC’s benchmark bank lending rate.
Analysts believe the central bank could cut the one-year interest rate on the MLF, which stands at 3.3%, in order to guide borrowing costs lower.
Analysts say the new LPR rate will be lower than the current level, but they are divided over the scope of reductions on borrowing costs for firms.
The PBOC launched the LPR in 2013 to reflect rates that banks charge their best clients. But the LPR has been reacting little to market demand and supply, with the one-year rate currently at 4.31%, versus benchmark one-year lending rate of 4.35%.
Ma said the LPR reform will help it better reflect changes in market rates and help lower corporate funding costs.
The central bank said it will improve the mechanism used to establish the LPR from this month, in a move to further cut real interest rates for companies as part of broader market reforms.
Chinese banks’ new LPR quotations will be based on open market operations, the PBOC said over the weekend. The national interbank funding center will publish the reference rate from Tuesday and on the 20th day of each month thereafter.
Banks will set rates on new loans by adding a spread to the new LPR reference rate, the central bank said.