A senior official from the People’s Bank of China (PBOC) has flagged further reforms of the loan prime rate (LPR) recently adopted as a primary benchmark for the Chinese financial system.
Liu Guoqiang (刘国强), PBOC deputy-governor, said that the authority would “continue to deepen LPR reforms and make the transmission of central bank policy rates to loan rates and deposit rates via market rates more smooth,” in an essay published by the Chinese central bank’s official news publication.
PBOC will “raise the quality of the quotations of quoting banks, publicly announce historic quoting information when appropriate, regularly implement refinement of quotes, and drive the gradual marketisation of deposit interest rates.”
Liu said that during the next phase PBOC would “establish a modern central bank system, improve the monetary supply adjustment mechanisms, and improve the formation and transmission mechanisms for market-based interest rates.”
“Interest rate marketisation is one of the core reforms for the economy and the financial sector,” said Liu. “Following two years of ongoing effort, LPR reforms have achieved major success.
“China has already formed a comparatively complete marketised interest-rate system, creating positive conditions for effectively employing interest rates as a key adjustment tool for the macro-economy.
“In the wake of reforms, the marketisation level of the LPR has markedly increased, and the quoting levels have gradually decline, promptly reflecting the downward trend in market rates.”
As of September the one-year LPR stood at 3.85% and the and the five-year lPR stood at 4.65%, for declines of 0.4 and 0.2 percentage points respectively since the launch of reforms.
“Declines in the LPR drive marked declines in enterprise loan rates, effectively prompting finance to cede profits to the real economy,” wrote Li.
In August the weighted average interest rate for enterprise loans in China was 4.62%, for a decline of 0.7 percentage points compared to July 2019, just prior to the launch of LPR reforms.