The People’s Bank of China (PBOC) has flagged the launch of further reforms to augment the sway of the benchmark Loan Prime Rate (LPR).
PBOC said in the “China Monetary Policy Execution Report” released on 15 September 2020 that it would drive the “orderly advance of LPR reforms,” and that “the marketisation of interest rates is one of the most critical reforms of Chinese finance.”
According to PBOC the view that interest rate reforms should first involve improvements to Funds Transfer Pricing (FTP) within banks prior to LPR reforms was “erroneous,” and that LPR formation reforms would strengthen the influence of the market on the interest rates of banks.
PBOC said that the next step for interest rate reforms would be to “achieve the integration of ‘two tracks into one'”.
“Reforms for the marketisation of interest rates are steadily advancing, but for a long period of time the problem of ‘two tracks’ has existed,” said PBOC.
“It is urgently necessary to achieve the integration of two tracks into one as part of reforms for the marketisation of interest rates.”
The LPR in China is the lending rate provided by commercial banks to their highest quality customers, and serves as the benchmark for rates provided for other loans.
At present the LPR reporting group is comprised of 18 commercial banks in China, and is announced on a monthly basis on the 20th of each month.
In August 2019 PBOC adopted measures to increase the influence of the LPR as part of broader market-based reforms of China’s interest rate regime.
PBOC said that LPR reforms had already “cleared out monetary policy transmission channels and driven a reduction in lending rates,” highlighting the following changes since the launch of reforms over a year ago:
- The LPR fully embodies the trait of marketisation;
- The LPR has already become the pricing benchmark for bank lending rates;
- The efficiency of the transmission of central bank monetary policy operations to lending rates has markedly strengthened;
- Reforms have proved markedly effective in reducing loan interest rates.
- The LPR derivatives market is rapidly growing.
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