China’s Loan Prime Rate Unchanged for 13th Consecutive Month in May as Economic Recovery Continues

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The benchmark rate for the Chinese banking sector has held steady for over a year, with domestic analysts pointing to the ongoing recovery of the economy from the impacts of COVID-19 as a key factor for its protracted stability.

The LPR’s is­sued by Chi­na’s Na­tional In­ter­bank Fund­ing Cen­ter (全国银行间同业拆借中心) on 20 May were 3.85% for the one year LPR and 4.65% for the five year LPR – the same as the readings for the preceding month. 

Chi­na’s LPR’s have re­mained at the same level since April 2020, when the one year LPR fell by 20 ba­sis points com­pared to the March read­ing of 4.05%, and the five year LPR fell by 10 ba­sis points from 4.75%. 

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.

The Na­tional In­ter­bank Fund­ing Cen­ter serves as the des­ig­nated pub­lisher of the LPR, and re­leases the fig­ures at 9:30 am on the 20th of each month, af­ter first col­lect­ing quotes from the group of re­port­ing banks and cal­cu­lat­ing the av­er­age of these quotes fol­low­ing ex­clu­sion of the low­est and high­est quotes.

Zhou Maohua (周茂华), financial markets analyst with China Everbright Bank, said to the Chinese central bank’s news outlet that the chief reason for the unchanged LPR in May is that “economic recovery has fundamentally satisfied expectations, and demand for loans in the real economy continues to flourish.”

“Interest rates for loans are rational, and continue to provide vigorous support for economic recovery,” said Zhou. “Additionally, because some banks still face pressure to supplement their capital…this significantly reduces their motivation to make downwards adjustments in rates for loans.”

Wang Qing (王青), chief macro-analyst with Golden Credit Rating, said that the average marginal cost of funds of banks had remained steady of late, and that there was still no impetus for quoting banks to make adjustments.

Since March the DR007 rate – considered representative of short-term market rates in China, has seen only a slight decline, while interbank certificate of deposit rates have also fallen just slightly, and the yields for structured deposits have held steady. Rates for fixed-term deposits of banks have posted a rise.

“While under China’s current interest rate regime the LPR is considered a market rate, it still undoubtedly has strong significance in terms of policy signals,” said Wang.

According to Wang the stability of the LPR is significant of China’s current monetary policy stance that “stability is the watchword” during the recovery of the economy from the COVID-19 pandemic.

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