Chinese Analysts Weigh in on First Decline in Benchmark Lending Rate Since Lifting of Wuhan Lockdown


Chinese analysts say that a recent decline in one of China’s key benchmark lending rates is significant of further “marketisation” of interest rates, and will have a targeted impact on the cost of funds across the economy.

China’s loan prime rate (LPR) recently saw its first decline in the more than 19 months since the end of the Wuhan lockdown.

The loan prime rates is­sued by Chi­na’s Na­tional In­ter­bank Fund­ing Cen­ter (全国银行间同业拆借中心) on 20 December were 3.8% for the 1-year LPR and 4.65% for the 5-year LPR. 

While the 5-year LPR remained unchanged compared to November, the 1-year LPR in December marked a decline of 5 basis points compared to the reading of 3.85% for the previous month.

Wang Qing (王青 ), chief macro-analyst with Golden Credit Rating, said that the fall in the 1-year LPR while the 5-year LPR remains steady is significant of further “marketisation” of China’s interest rate regime, with lending rates undergoing adjustment when appropriate in response to changes in market rates.

“This is also a concrete expression of increase in the transmission effectiveness of monetary policy,” said Wang.

Lv Zhengwei (鲁政委), chief economist with Industrial Bank, said that the decline in the benchmark rate was the result of recent monetary policy manoeuvrings, and would help to drive funding to China’s real economy.

“Since 2021 the Chinese central bank has expanded the vigour of cross-cyclical adjustments, and maintained rationally ample liquidity in the banking system,” said Lv.

“With the combined effect of policies including two reserve cuts, optimisation of deposit rate self-disciplinary management, and reductions in the interest rates for reloans to support agriculture and small businesses, banking fund costs have accumulated considerable scope for decline, which eventually drove a fall in the 1-year LPR.

“It can be said that the LPR decline is an overall reflection of the central bank’s flexible and moderate monetary policy and rationally ample liquidity in the banking system, as well as fully embodies the marketisation traits of the LPR quote formation mechanism.”

Zhou Maohua (周茂华), financial markets researcher with Everbright Bank, said to the Chinese central bank’s news outlet that enterprise lending in China is already fully based on the LPR. Consequently, a decline in the one -ear rate will help to guide banks to reduce overall funding costs for the real economy, rationally “transfer profits” to the real economy, and stimulate the vigour of small market actors.

Zhou further points out that the 5-year LPR remaining unchanged is significant of efforts by regulators to maintain stability of the real estate market.

“This clearly indicates that real estate policy will continue to make stability the watchword, and real estate will not be used as a form of short-term economic stimulus,” said Zhou.