Chinese Central Bank Drives Use of Loan Prime Rate as Benchmark for Floating-rate Loans

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The People’s Bank of China is driving further use of the loan prime rate (LPR) as a benchmark or the pricing of existing floating-rate loans, in a bid to reduce borrowing costs in the Chinese economy.

On 28 December PBOC issued the “People’s Bank of China Public Announcement [2019] No. 30” (中国人民银行公告〔2019〕第30号).

According to the Announcement “starting from 1 March 2020 financial institutions should engage in negotiations with existing floating-rate loan clients to change the pricing benchmark, and shift from the original contractually stipulated pricing method to use of the LPR as the pricing benchmark.”

The Announcement said that this transition process should be in principle be completed by 31 August 2020.

PBOC has also prohibited financial institutions from entering floating-rate loan contracts that make reference to the previous loan benchmark rate starting from 1 January 2020.

PBOC launched the latest round of LPR reforms in August 2019, in order to increase the influence of the LPR as part of broader market-based reforms of China’s interest rate regime.

PBOC said at the time 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.”

Wen Bin (温彬), chief researcher with China Minsheng Bank, said that the implementation of PBOC’s latest announcement will result in greater use of the LPR as a guidance mechanism for real interest rates, and drive a reduction in financing costs for the real economy.

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