China’s Introduction Of Loan Prime Rate Promotes Interest Rate Liberalization

The author is ANZ (The Australia and New Zealand Banking Group) Research

China’s central bank launched a system for a loan prime rate (LPR) today, according to a statement posted on PBoC website.

The LPR is similar to the indicative rate of interest at which banks lend to favored customers, ie, those with good credit, though banks may not always lend at the best lending rate.

The variable portion may be expressed as a percentage above or below prime rate.

This is seen a step towards further interest rate liberalization, as the LPR could replace the current policy lending rate and will be used as a new benchmark for lending rates gradually.

China removed the floor for policy lending rates in July, thus financial institutions are allowed to set their own lending rates.

Today’s LPR is 5.71% for a one-year tenor, compared with current policy lending rate of 6%.

We think this is a reasonable level as commercial banks normally offer 10% discount of the policy lending rate to the best customers.

Nine banks will submit the lending rate they charge their best clients, and China’s inter-bank funding center will calculate a weighted average rate based on the submissions.

(The article has been edited for clarity)

China Expert network