Why China’s Benchmark Loan Prime Rate Remained Stationary in November

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One of China’s leading financial commentators says the country’s benchmark loan prime rate (LPR) could see further declines after spending three months unchanged.

The LPRs announced on 21 November came in at 3.65% for the one-year tenor and 4.30% for the five-year tenor, remaining unchanged compared to the prints for the previous month. November marks the third month that China’s LPR has held stationary.

Dong Ximiao (董希淼), chief researcher for Agricultural Bank of China (CBC) and researcher at the Fudan University Financial Research Institute, highlights three reasons that China’s LPRs remained unchanged in November:

  1. China’s policy rates remained unchanged in November. On 15 November the Chinese central bank undertook medium-term lending facility (MLF) and 7-day reverse repo operations at rates of 2.75% and 2.0%, on par with the previous round of open-market operations last month.
  2. There have been multiple cuts to the LPR since the start of 2022. China has seen a total of three cuts to the LPR in 2022, bringing the one-year LPR down 15 basis points and the five-year LPR down 35 basis points. These reductions have highlighted the guidance role of the benchmark rate, with financing costs for the real economy markedly declining.
  3. Lending rates in China are at historic lows. According to the Q3 Monetary Policy Execution Report released by the Chinese central bank, the weighted average interest rate for enterprise loans in September was 4.0%, for a decline of 0.59 percentage points compared to the same period last year, and at its lowest level since records began.

Since the start of 2022 China’s LPRs have seen three reductions, as financial authorities sought to keep the real economy afloat amidst renewed Covid lockdowns by reducing the cost of borrowing.

These cuts included:

  • On 20 January, a 10 basis point cut to the one-year LPR to 3.7%, and a five basis point cut to the five-year LPR to 4.6%.
  • On 20 May, a 15 basis point cut to the five-year LPR to 4.45%, with the one-year LPR remaining unchanged at 3.7%.
  • On 22 August, a five basis point cut to the one-year LPR to 3.65%, and a 15 basis point cut to the five-year LPR to 4.3%.

Dong points out that the Chinese central bank adopts measures across two areas to reduce the cost of funds for banks and guide declines in the LPR:

  1. Reduction to the reserve requirement ratio, which Dong says markedly reduces the cost of funds for banks and strengthens the “continuity” of profit transfers to the real economy. At present the weighted average reserve ratio is 8.1%, leaving room for further declines.
  2. Reductions to policy rates for open market instruments. Further reductions to policy rates for MLF and reverse repos creates conditions for declines in the LPR.