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Economy

China's central bank unveils de facto rate cut with new benchmark

Revamped 4.25% rate aims to address elevated funding costs for small businesses

The People's Bank of China seeks to have market conditions play a larger role in determining interest rates.   © Reuters

BEIJING -- The People's Bank of China launched a reworked, market-driven benchmark lending rate Tuesday in a move that amounts to an effective rate cut. The aim is to guide borrowing costs lower and improve access to capital, particularly for small businesses.

The central bank directed banks to refer to the revamped loan prime rate, or LPR, when setting interest rates on new loans. It set the new rate at 4.25%, a 6-basis-point cut from the previous LPR, and 10 basis points lower than the government's 4.35% benchmark one-year lending rate. The LPR will now be based on prices submitted by lenders in terms of a spread over the interest rate on the central bank's medium-term open market operations.

The old LPR was tightly correlated with the government's benchmark rate, which has stayed essentially flat since a 25-basis-point cut in October 2015. The PBOC's medium-term lending facility rate of 3.3% is close to actual interbank loan rates.

Given that the ultimate goal of the changes is to make borrowing cheaper for small and midsize businesses, the rate announced Tuesday was widely expected to be below the one-year benchmark. The move has been called a rate cut by another name.

The PBOC aims to end the disconnect between market and official rates that has kept borrowing costs stubbornly high no matter how low market rates fall. Even as the overnight Shibor interbank lending rate dropped below 1% for the first time in a decade in late June -- down more than 1 percentage point from the end of 2018 -- the average lending rate for that month edged up slightly over the same period to 5.66%.

The central bank also seeks to use the reforms to discourage collusion among lenders looking to avoid competition that would put pressure on their earnings. Banks have set a tacit floor on interest rates of 0.9 times the benchmark, according to the PBOC.

The new LPR will be disclosed on the 20th of each month. Quotations will be provided by 18 banks, including the 10 big lenders that participate now as well as regional, foreign, agricultural and private-sector lenders.

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