China | LPR: China’s Market-based “Policy” Rate

Summary

China’s central bank announced the elimination of its previous benchmark lending rate as monetary policy rate. Moreover, they made a market-driven Loan Prime Rate (LPR) as the reference rate for banks to price their financial products. It signals the transformation of “dual-track” system to the new “single-track” system.

Key points

• Key points:
• China’s central bank announced the elimination of its previous benchmark lending rate as monetary policy rate.
• The PBoC’s move signals the transformation of the previous “dual-track” interest rate system to the new “single-track” system.
• The new LPR pricing system is a market based one which delegates the price-setting power to the 18 designated banks.
• The move was expected to make Chinese monetary policy transmission mechanism smoother by combining the previous “dual-track” interest rate systems into “one-track”.
• In addition, it effectively cut the interest rate. In the final two months of this year, we predict the LPR will be reduced by 0.05% every month. That means, at end of this year, the LPR will reduce to 4.1%. And we forecast LPR at end-2020 will be reduced to 3.9%.

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