PBOC’s Monetary Policy Committee Commits to Further Reductions in Real Interest Rates for Loans

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The Chinese central bank has reiterated its commitment to reductions in borrowing costs for key areas of the real economy.

The Monetary Policy Committee of the People’s Bank of China (PBOC) recently convened its routine meeting for the first quarter of 2021, where it restated the need to “drive further declines in real interest rates for loans.”

The announcement comes after China’s 2021 Government Work Report called for “driving further declines in real interest rates for loans,” alongside “optimising regulation of deposit rates and further guiding the financial system to transfer profits to the real economy.”

Analysts said that the move will focus in particular upon those sectors of the Chinese economy still reeling from the impacts of the COVID-19 pandemic.

“At present, even though the Chinese economy continues to revive and has shown recovery growth, some sectors and enterprises – in particular micro and small-enterprises, continue to face considerable pressure,” said Wen Bin (温彬), chief researcher with China Minsheng Bank to PBOC’s Financial News.

“For this reason driving further reductions in the real interest rates for loans helps transfer profits to the real economy, and helps enterprises to better recover, playing an active role in the stabilisation of employment.”

Yuan Xiaohui (原晓惠), researcher with the Bank of China (BOC), said that the overall focus will be financial inclusion for Chinese small businesses.

“This years Government Work Report has stressed further resolving the financial difficulties of micro, small and medium enterprises,” said Yuan to Financial News.

“Resolving the problems of financing being difficult and expensive for micro, small and medium enterprises, driving further reductions in financing costs for enterprises and further raising the convenience of financing are key areas of ongoing effort for China’s financial reforms.”

Yuan highlighted the importance of interest rate reductions as means of deepening financial reforms and driving Chinese banks to upgrade their capabilities.

“With net interest margins of banks coming under pressure in a global environment of low interest rates, further optimising balance sheet management, raising loan service efficiency and optimising the lending structure and lending quality have all become the necessary choice for banks to achieve high-quality growth,” said Yuan.

“Against the background of China’s stable monetary policy, further driving reductions in real interest rates for loans can increase the ability of banks to service the real economy, and is also an important means for raising the competitiveness of commercial banks.”

Zeng Gang (曾刚), chair of the National Institution for Finance & Development (NIFD), highlighted the ability of interest rate reductions to abet the effective implementation of monetary policy.

“Driving further reductions in the real interest rate for loans has another positive for the growth of the real economy, which is that it helps to stabilise market expectations.

“This move can prevent the market succumbing to excessively intense expectations of or reactions to monetary policy, and help to stabilise financial markets.”

Analysts also point out that measures to drive improved management of liabilities by Chinese banks will help pave the way for lower rates for loans.

These measures include a crackdown on the use of structured deposits by banks, as well as the issuance of the “Notice Concerning Further Standardizing Commercial Bank Internet Loan Operations” (关于进一步规范商业银行互联网贷款业务的通知) and the “Commercial Bank Liabilities Quality Administrative Measures” (商业银行负债质量管理办法).

“These measures improve the quality of bank liabilities, as well as drive further reductions in the liabilities costs of banks, thus driving declines in quotes for bank loans, and eventually achieving the policy goal of reducing real interest rates for loans,” said Wen Bin.

Given that China’s loan prime rate (LPR) is set to remain stable in the near-term, Wen Bin said that banks should adopt targeted measures to reduce interest rates for loans on the basis of Chinese macro-policy and PBOC guidance, while also providing targeted support to areas highlighted by regulators.

“For the banks, they will still need to support channelling of funds towards key areas such as financial inclusion for micro and small enterprises, green financing and rural village revival, and other areas closely related to national strategy,” said Zeng Gang.

“In future it will be necessary to expand the vigour of support for green financing and enterprises in tech innovation,” said Yuan Xiaohui.

Yuan also called for banks make use of fintech to optimise loan review procedures and further reduce lending costs.

“All banks should strengthen basic data mining and applications, and small and medium-sized banks in particular need to strengthen their cooperation with large-scale banks, in order to further set the foundations for efficient credit review and extension.”

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