Thursday, 19 September, 2019

China's loan prime rate falls to 4.25% under new mechanism

AP Images AP Images
Russell Knight | 22 August, 2019, 13:29

Asian stocks trade higher on China's bank new loan prime rates news.

The new mechanism would force banks to price their loans closer to market rates. Some analysts are calling the move the equivalent of a guided rate cut.

However, despite some fluctuation, that national one-year LPR has remained largely unchanged since October 2015, data from the center show. He said that if the U.S. Federal Reserve cuts interest rates on September 18, the PBOC is likely to lower the MLF rate by 15-20 bps, which would in turn push LPR rates lower. Presently, the People's Bank of China (PBC) relies little on changing interest rates to alter financial activity and more on altering the required reserve ratio. Indeed, existing loans including mortgages are still exempt from the new benchmark scheme.

As China's economic growth has slowed amid an escalating USA trade war and sluggish domestic demand, regulators want to boost the economy by lowering borrowing costs for companies, particularly private firms and small and midsize enterprises (SMEs).

The new above-five-year LPR was 4.85 percent.

China lowered its new lending reference rate slightly on Tuesday, as expected, as the country's central bank kicked off new interest rate reforms created to lower corporate borrowing costs.

The LPR, originally introduced by the PBOC in October 2013, is an interest rate that commercial banks charge their best clients and was meant to better reflect market demand for funds than the benchmark the PBOC sets.

The rate was slightly lower than the 4.31-percent reading from the previous mechanism, and also lower than the 4.35-percent central bank benchmark lending rate.

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.

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The PBOC said in a statement over the weekend that the 18 banks helping set the new rate should submit quotations in multiples of 5 basis points.

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.

"Overall, it is a modest cut in line with our expectations, though in the future, it's expected the LPR could go further lower, as China has its own target of steering funding costs lower", said Shen Xinfeng, an analyst with Northeast Securities.

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

That said, banks may need to do some "national service" by lowering their average loan rates, but then might try to make up for their lower profits by increasing the price of riskier loans to private firms and SMEs, according to economists at Nomura International (Hong Kong) Ltd.

Economists expect that the reform will cut into commercial banks' lending margins.

The pressure on banks will finally be transmitted to borrowers, some analysts said.

"The lower the rate, the more positive the reaction in the market", Lien said.

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