China's loan prime rate falls to 4.25% under new mechanism

Xinhua
China's National Interbank Funding Center announced on Tuesday that the one-year loan prime rate (LPR) came in at 4.25 percent.
Xinhua

China's National Interbank Funding Center announced on Tuesday that the one-year loan prime rate (LPR) came in at 4.25 percent, the first quotation after the country decided to reform the lending rate mechanism.

The new above-five-year LPR was 4.85 percent.

Introduced in 2013 and disclosed every trading day, the LPR functioned as a market-based reference for lenders to set their loan interest rates, but the quotation was still largely linked to the central bank's benchmark lending rate, which saw little fluctuation in past years.

To better reflect market changes, the central bank on Saturday released a plan to improve and reform the LPR mechanism in its latest move to guide borrowing costs lower to support the real economy.

Under the revamped mechanism, the new LPR's quotations are based on the central bank's open market operations (especially the medium-term lending facility interest rate), and banks are required to set rates on new loans using the new LPRs as the benchmark.

The one-year LPR announced Tuesday was lower than the 4.31-percent rate from the previous mechanism, and also lower than the 4.35-percent benchmark lending rate.

"The LPR reform marked a step forward in China's push towards interest rate liberalization," said a research note by China International Capital Corporation Limited.

Among the changes, the number of quotation banks are expanded from 10 to 18, including not only national banks but also urban commercial banks, rural commercial banks, foreign-invested banks and private banks.

The new LPRs will be disclosed at 9:30am on the 20th day of each month. Tuesday's rates will be effective until the next release on September 20.

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