China’s Central Bank adopts New Loan-Pricing Regime

The Central Bank of China, People’s Bank of China will move towards a more responsive market movement from next year as it has ordered lenders for adopting a new loan-pricing regime. All financial institutions in China as per the notification issued by its central bank on Saturday, 28th December 2019 have been directed to stop using the existing lending rate for all sorts of credits issued by them from January 2020. The new lending rates will be based on the Loan Prime Rate (LPR). LPR was introduced in China by its central back in 2013 that’s allows commercial banks in China to offer preferential lending rates for its prime clients. The LPR is set on a monthly basis on the 20th of the month since August this year by the Chinese Central Back, earlier it was set on a daily basis, in December 2019, the LPR was lower at 4.15% than the Benchmark Rate of 4.35%.

Even though the new lending rates would not involve a straightforward cut, the move will further liberalize the financial system of China and boost its overall economy as it would lower the outstanding loans held by its financial institutions. Early estimations by financial experts suggested that the outstanding loans would lower around 152 Trillion Yuan.

For controlling the interest rate and to control the money supply, over the years the Chinese Central Bank has used multiple monetary policies. Linking the Benchmark rate to LPR will be welcomed by small businesses in China, especially looking at the slow down faced by the Chinese market due to the ongoing trade war with the United States.  According to financial analysts, the new lending rates will make the monetary policy more effective.

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