SHANGHAI/BEIJING - China’s central bank pushed out long-awaited interest rate reforms on Saturday by establishing a reference rate for new loans issued by banks to help steer corporate borrowing costs lower and support a slowing economy.
However, the LPR’s moves since its launch have generally not reflected those market dynamics with lenders typically reluctant to cut into their profit margins with lower rates and was little-watched by the markets. The one-year rate, for example, is currently just below the benchmark one-year lending rate of 4.35%.
In addition to the existing one-year LPR, the central bank will also use contributing bank quotations to publish similar reference rates for benchmarks of five-years and beyond. Banks will retain discretion as to how they price rates for loans maturities of less than 1-year and within 1-5 years. Beijing has vowed to lower average funding costs for small companies by 1 percentage point this year to spur growth in the economy, amid weak demand domestically and a year-long trade war with the United States.The latest move is widely interpreted by the market as an official attempt to revive growth and effectively cut financing costs in the real economy.
“In our view, the PBOC will likely have to walk a tightrope between lowering borrowing costs and maintaining financial stability,” Lu added.