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China : CHINA reveals more market-oriented lending rate
Publish Date : 29-Oct-2013
China's central bank declared the launch of Loan Prime Rate (LPR), a new benchmark lending rate for commercial banks designed to make interest rates more market-oriented.
The People's Bank of China (PBOC) stated in a statement that LPR is based on lending rates reported each working day by nine commercial banks designated by the central bank.
The nine comprise the country's five state-owned banks and another four Chinese banks -- China Citic Bank, Shanghai Pudong Development Bank, Industrial Bank and China Merchants Bank.
Those banks are required to report lending rates for their best customers to the central bank each working day, which will then evaluate the weighted average after exclusive of the highest and lowest rates to form the LPR, the central bank said.
The central bank in the initial stage will only release the one-year LPR to the public on the website of the Shanghai Interbank Offered Rate.
Formerly, the central bank would raise or lower the benchmark deposit and lending rates from time to time based on changing market situations.
The PBOC said in the statement that for smooth transition to the new mechanism, it will continue to announce changes in the benchmark rates for an unspecified period of time.
According to the statement, the one-year LPR will serve as a new benchmark for commercial banks to decide other lending rates.
The LPR mechanism is a important part of the central bank's move to push for market-oriented interest rate formation.
The statement said, "The mechanism is conducive to raising the efficiency and transparency in pricing credit products of financial institutions and promoting banks' capability of independent pricing".
The central bank added that the new mechanism will make interest rate formation more rational and thus be good for maintaining market order.
Guo Tianyong, a professor with the Central University of Finance and Economics said, "But the independent pricing of commercial banks is not mature at present, and there is likely to be problems like vicious competition and a state of disorder".
Guo said, The LPR will serve as the reference for commercial banks to decide their lending rate, and so "it is beneficial for forming a scientific and reasonable interest rate formation system".
Experts consider the new mechanism will have restricted impacts on the financial market in the short term.
Guo said, adding that the PBOC should begin to consider how to pass its regulatory intentions to the market base on the LPR, "The LPR mechanism will pose a challenge for the central bank's monetary control".
Xu also stated that it will take a long time for the market to get a sense of the PBOC's intentions from the LPR mechanism.
