The People’s Bank of China (PBOC) is launching a new interest rate reform as part of efforts to reduce funding costs for companies.
The Chinese central bank announced on 17 August that its new loan prime rate (LPR) quoting method will be officially launched on 20 August.
“In order to deepen interest rate marketisation reforms, raise interest rate guidance efficiency and drive reductions in the financing costs of the real economy, PBOC has decided to reform and improve the loan prime rate (LPR) formation mechanism,” said PBOC in an announcement.
“Starting from 20 August 2019 PBOC will authorise the National Interbank Funding Centre to announce the LPR at 9:30 am on the 20th of each month. The public will be able to inspect it on the websites of the National Interbank Funding Center and PBOC.”
PBOC said that the LPR will be determined based on open market operating rates, and the medium-term lending rate in particular.
The National Interbank Funding Center will calculate the LPR based on the average open market operating rate following the exclusion of the highest and lowest quotes.
PBOC said that in order to “raise the representativeness” of the LPR, it has increased the number of quoting banks from 10 to 18, to include municipal commercial banks, rural village commercial banks, foreign invested banks and private banks in addition to national banks.
The LPR will also be expanded from a single one-year rate to two rates- a one-year rate and a five-year rate.
PBOC said that “all banks should mainly make reference to the LPR for the issuance of new loans, as well as use the LPR as the pricing benchmark in floating rate loan contracts.”
“No banks are permitted to use collusion to set any form of hidden bottom on the setting of loan interest rates.”