China trims lending rates with new benchmark, more cuts expected
* China kicks off interest rate reforms with new LPR
* New benchmark lending rate set slightly lower, as expected
* Analysts expect PBOC to cut MLF rates to bring down LPRs
* Analysts see only small boost to economy, banks risk
* C.bank says to keep previous benchmark lending rate for
(Adds weighted average lending rate)
By Winni Zhou and Kevin Yao
SHANGHAI/BEIJING, Aug 20 (Reuters) - China lowered its new
lending reference rate slightly on Tuesday, as expected, as the
central bank kicked off interest rate reforms designed to reduce
corporate borrowing costs in the world's second-largest economy.
But the tiny reduction in the revamped Loan Prime Rate (LPR)
reflected Chinese banks' continued reluctance to lower their
lending rates and face leaner profit margins. That has fueled
expectations Beijing will need to cut rates again soon in some
form to support struggling businesses.
The People's Bank of China (PBOC) on Saturday designated the
LPR the new lending benchmark for new bank loans to households
and businesses, replacing the central bank's benchmark one-year
The new one-year LPR was set at 4.25% on
Tuesday, down 6 basis points (bps) from 4.31% previously. It was
10 bps lower than the PBOC's existing benchmark one-year lending
The new reference rate is calculated from price contributions
from a larger group of banks than the previous rate, including
some smaller lenders which as a group tend to have higher
funding costs and greater exposure to bad loans.
"While this should nudge banks to reduce lending rates
slightly, the impact on economic activity will be marginal,"
Capital Economics Senior China Economist Julian Evans-Pritchard
said in a note. "A decline of only a few basis points is small."
He also said the PBOC would need to take other steps,
including cuts to medium-term liquidity (MLF) rates, if it wants
to continue reducing the new reference rate. The new system
links the two rates.
Despite economic growth nearing 30-year lows, analysts say
China's central bank has been reluctant to cut interest rates
system-wide due to fears of adding to a mountain of debt and
fueling property bubbles. It last cut the one-year lending rate
in 2015. Indeed, existing loans including mortgages are still
exempt from the new benchmark scheme.
PBOC Vice Governor Liu Guoqiang told reporters on Tuesday
that there is room for cuts in both the banks' reserve
requirement ratios (RRRs) and interest rates, but added the
central bank's previous benchmark rate may not be changed in the
near term. It is being retained for an unspecified period.
Highlighting worries about property risks, Liu also said
policymakers do not want to see further declines in mortgage
rates, and will ensure they remain basically stable.
The new five-year LPR rate was set at 4.85%, according to
the PBOC's national interbank funding centre, which was below
the five-year benchmark lending rate of 4.90%.
Under the reforms, the LPR will broadly track changes in the
PBOC's medium-term rates, making banks' lending rates more
market-based. MLF rates are generally seen as the rates banks
pay for their funding and are determined through the central
bank's open market operations bidding process.
Analysts say the reforms are an official attempt to lower
financing costs in the economy, which has faced continued
pressure from weakening demand at home and an extended trade war
with the United States.
The new mechanism would force banks to price their loans
closer to market rates. The weighted average lending rate for
companies and home buyers was 5.66% in the second quarter.
"To all intents and purposes it is a 'stealth' easing
policy," brokerage Jefferies wrote in a note.
Some market participants expect the central bank will cut
the interest rate on one-year MLF, which could essentially bring
the LPR down further.
The MLF rate is currently 3.3%, 95 bps below the new
A batch of one-year MLF loans worth 149 billion yuan
($21.08 billion) is set to mature on Monday. If these loans are
rolled over, the PBOC could lower the rate, opening the door to
an LPR cut. The new rate is set on the 20th day of every month.
Wen Bin, chief economist at Minsheng Bank in Beijing,
expected reductions in MLF rates to come next month. He said
that if the U.S. Federal Reserve cuts interest rates on Sept.
18, the PBOC is likely to lower the MLF by 15-20 bps, which
would in turn pull LPR rates lower.
"The first rate came in higher than expected," Li Wei, China
economist at Standard Chartered Bank, said, expecting the new
rate to fall over coming months.
The LPR, originally introduced by the PBOC in October 2013,
is an interest rate that commercial banks charge their best
clients and was intended to better reflect market demand for
funds than the benchmark the PBOC sets.
However, many Chinese banks continue to favour state-backed
companies over smaller firms which are considered higher credit
risks, especially in times of economic weakness.
($1 = 7.0674 Chinese yuan)
(Additional reporting by Cheng Leng and Yawen Chen; Writing by
Sam Shen in SHANGHAI; Editing by Sam Holmes & Kim Coghill)
First Published: 2019-08-20 03:44:31
Updated 2019-08-20 12:39:11
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