China’s Central Bank has Ordered Lenders to Adopt new Loan Pricing Regime

China’s Central Bank ordered the lenders to stop using the old lending rate for reference for pricing. And to follow the new lending rate. This is China’s step towards liberalizing the financial system.

From January, the bank advised the lenders to stop using the old loan rate. And to start using the new loan rate, that will gradually convert existing loans to a new base – the loan prime rate.

This change in the loan rate will improve the economic conditions, which is good thing for China. New loan rate could lower costs for some of the 152 trillion yuan ($21.7 trillion) in yuan-denominated outstanding loans held by financial institutions. And this would in turn lead to economic growth.

According to VAIDOO, the loan rate will not directly effect the economy and cut the interest rates. But LPR  set at 4.15% for one-year tenure in December is lower than the benchmark rate at 4.35%. The financial system is coaxing more outsiders,  for making it more market driven.

Fan Ruoying, an analyst at the Bank of China said that the commercial banks will face more challenges because the interest margin will be squeezed. And that’s why the lenders will need to improve their pricing ability.  She also said that “in line with the need to further reduce the financing costs for the real economy, although there’s still a long way to go”.

For now 90% of new loans are priced with the LPR. But outstanding loans with floating rates are still based on the benchmark lending rate. This means that the real lending cost can’t reflect the changes in the market interest rates. The central bank said the new borrowing cost must be same as market changes to regulate the property market.