The Chinese Central Bank introduced a key rate reform on Saturday to lower corporate credit costs and support a slowing economy that was affected by a trade war with the United States.
The People's Bank of China (PBOC)) said it would improve the mechanism for determining the interest rate on loans (LPR) from this month on, in order to further reduce real interest rates for companies in the context of wider market reforms.
Analysts say the following step is taken Data showing weaker-than-expected growth in July following a Friday's policy statement underscore the government's attempts to implement reforms to support a slowing economy.
"By reforming and improving the mechanism for creating LPR, we can use market-based reform methods to lower real lending rates," reads a statement published on its website.
The central bank will "deepen" market-based interest rate reform, improve the efficiency of interest transfer and reduce the financing costs of the real economy, "it said.
The new LPR quotations of Chinese banks will be based on the rates for open market operations and the national Interbank Funding Center is authorized to publish the interest rate as of August 20, PBOC said, adding that the interest rate will be published every month on the 20th and will enter into force this month.
Specify interest rates on new loans by mainly referring to the LPRs and using LPR as the benchmark for variable rate lending. Banks are prohibited from co-ordinating an implicit floor on lending rates.
The Central Bank announced that to extend the existing one-year LPR for a period of five years and more which will help banks set interest rates on long-term loans. Term loans, such as mortgages.
China will add eight small banks, including two foreign-funded banks, to the existing ten national banks that are eligible to submit LPR quotations, the central bank said.
followed on Friday the Chinese State Council's pledges that the country would resort to market-based reform measures to lower real interest rates for businesses.
The central bank announced that it would step up its supervision of bank interest rates and penalize banks for irresponsibility that disturbs the market order.
The central bank will include the application of the LPR in its macro prudential valuation (MPA) to urge banks to apply LPR pricing at the beginning of the third quarter more sharply than expected, as the worsening trade war with the United States firms and consumers were more affected.
Economic growth slowed to nearly 30 years in the second quarter. Tang Jianwei, an economist with the Bank of Communications in Shanghai, said the reform could be seen as a key rate cut as PBOC could set key interest rates for its open market operations closely followed by the LPR.
"The instrument (LPR listing reform) represents a rate cut and is only displaced by the PBOC at critical moments," said Dai Zhifeng, an analyst at Zhongtai Securities Co.
. The central bank has pledged to "track" two step-by-step interest rates ̵
In order to release funds for lending and finance local government projects, most analysts continue to believe that the central bank will continue to lower banks' reserve requirements (RRRs) in the coming months, in addition to Six reductions Since early 2018.
Sources have told Reuters that more aggressive measures, such as interest rate cuts, are a last resort as they could encourage a sharper rise in debt.
In July, central bank chief Yi Gang said China would keep its bank Mark deposit rate for a relatively long time, but would phase out its benchmark rate to standardize the policy rate and market-based interest rates.
China's banks are currently rating their loans based on current interest rates unchanged since October 2015, hampering the central bank's efforts to reduce borrowing costs.
The PBOC launched the 2013 LPR to reflect the interest rates charged by banks to their best customers. However, the LPR responded only slightly to the demand and supply of the market. Compared to the reference rate of 4.35% for one year, the interest rate was currently 4.31% for one year.
China's short-term money market rates have fallen more rapidly in recent months due to central bank cash injections.