Date
10 January 2020
China's central bank has ordered financial institutions to use a new benchmark for floating rate loans from Jan 1. Photo: Reuters
China's central bank has ordered financial institutions to use a new benchmark for floating rate loans from Jan 1. Photo: Reuters

China to switch benchmark for floating-rate loans

China’s central bank will use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans, a move that could help lower borrowing costs and underpin economic growth, Reuters reports.

Starting on Jan. 1, financial institutions will be prohibited from signing floating-rate loan contracts based on the previous benchmark bank lending rate, the People’s Bank of China (PBoC) was quoted as saying in a statement on Saturday.

Floating-rate loans, excluding individual housing loans tied to state provident funds, which have been signed before 2020 will be priced in line with the LPR, the central bank said.

Under the new rate regime unveiled in August, the revamped LPR is linked to the medium-term lending facility (MLF), a key policy rate of the PBoC.

“The purpose of the step is to make interest rates more market-driven and help lower financing costs,” Wen Bin, an economist at Minsheng Bank in Beijing, told Reuters.

The one-year loan prime rate (LPR) is at 4.15 percent, down by 16 basis points from August.

The previous benchmark bank lending rate has been kept steady at 4.35 percent since October 2015.

The five-year LPR is at 4.80 percent.

Analysts expect the central bank to cut the MLF rate by 20-30 basis points in 2020, which could pave the for way for lowering the LPR further.

From March 1, financial institutions will negotiate with customers on terms for converting the pricing benchmark on their loan contracts into the LPR, the PBoC said.

The converted lending rate on the existing commercial individual housing loans should remain unchanged, in order to implement the government’s property regulations, it bank said.

The benchmark conversion should be completed before the end of August, the central bank added.

Nearly 90 percent of new loans are benchmarked against the LPR, but the existing floating rate loans are still priced based on the previous benchmark lending rate, which “cannot reflect the changes of market interest rate in a timely way”, the PBoC said.

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