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Northeast Asia

PBoC: China’s rate reform is no reform at all

The People's Bank of China has thrown out a four-year-old lending rate and introduced two new references, but onshore bankers have doubts about what the central bank's change will achieve.

By Rebecca Feng


The PBoC’s lending rate reform needs to go further, say bankers

The People’s Bank of China (PBoC) has reformed the loan prime rate (LPR), turning what was previously a sideshow in the domestic monetary system into the main reference rate for loans. The new LPR will be updated monthly and will be based on indicative quotes from 18 banks’ loans to their prime clients, with both the highest and lowest figures removed.

The move means that China’s domestic loan market will finally break free from a reference rate that has not changed since October 2015: the central bank’s one-year lending rate of 4.35%.

The reform does two things. First, it uses another rate as the benchmark. Instead of using this one-year lending rate, the central bank says it will use LPR. Second, it changes the way LPR is calculated.

The purpose of the long-awaited rate reform is twofold: to lower the funding cost of the real economy and to make the country’s benchmark interest rate more market-driven, according to an official statement from the PBoC.

So far, the impact seems negligible. The central bank announced the first pair of LPR numbers after the reform on August 20.

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