China takes another stab at reducing rising borrowing costs by using the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans. Beginning Jan. 1, 2020, financial institutions will no longer be allowed to sign floating interest rate contracts based on benchmark lending rates.The bank lending rate has remained unchanged at 4.35% since October 2015. The five-year LPR is at 4.80%.
The People's Bank of China (PBOC) over the weekend said financial institutions and their clients can decide the interest rates of existing loans through negotiations in the adjustment period from March to August 2020. Existing interest rates set on benchmark lending rates will be replaced by adding basis points to related LPRs.
Existing interest rates based on benchmark lending rates will be replaced by adding basis points to related LPRs. The interest rate benchmark can only be switched once. PBOC said loan rates in the last interest repricing period won't need to be adjusted. Floating-rate loans, excluding individual housing loans tied to state provident funds, signed before Jan. 1, 2020 will be priced in line with the LPR.
From March 1, financial institutions will negotiate with customers on terms of converting the pricing benchmark on their loan contracts into the LPR. The converted lending rate on the existing commercial individual housing loans should remain unchanged, to implement the government's property regulations. The benchmark conversion should be completed before the end of August.
Nearly 90% of new loans are benchmarked against the LPR. On the other hand, 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," said PBOC.
Starting March 1, financial institutions will negotiate with customers on terms of converting the pricing benchmark on their loan contracts into the LPR. PBOC said the converted lending rate on the existing commercial individual housing loans should remain unchanged to implement the property regulations. It said the benchmark conversion should be completed before the end of August.
In the new rate regime unveiled August, the revamped LPR was linked to the medium-term lending facility (MLF), a key policy rate of the PBOC. Analysts expect PBOC to cut the MLF rate by 20 to 30 basis points in 2020. Analysts believe this will pave the way for lowering the LPR further.
"The purpose of the step is to make interest rates more market-driven and help lower financing costs," said Wen Bin, an economist at Minsheng Bank in Beijing.
Analysts contend the move is necessary due to a slowdown in China's economic growth to 6.0% in the third quarter, a near 30-year low. Beijing plans to set a lower economic growth target of some 6% in 2020. It will rely on increased state infrastructure spending to curb a sharper slowdown,
Analysts also say easing trade tensions with the United States might relieve pressure on exports. On the other hand, further policy loosening is still needed to cope with weak demand at home and abroad.
