(Bloomberg) -- Loans will get a little cheaper for Chinese companies after officials introduced a revamped market benchmark rate for the first time.
China’s new one-year reference rate for bank loans will start at 4.25%, according to a statement from the central bank on Tuesday. That compares to the 4.24% median estimate in a Bloomberg survey of 11 traders and analysts. The previous loan prime rate was 4.31%, while the one-year benchmark lending rate is 4.35%. China will set the LPR on the 20th day of every month.
The change is part of China’s push to connect its interest-rates system to conditions in financial markets. The aim is to help lower the country’s sticky borrowing costs for households and companies, boost lending activity and support a slowing economy. From Tuesday, new loans must be priced “mainly” with reference to the new LPR, which is linked to the price the People’s Bank of China charges lenders for cash over a year.
Some expect the central bank will do more this year to lower borrowing costs. Citic Securities Co. analysts predict a cut in the rates charged on medium-term lending facilities, or a targeted reduction in the reserve-requirement ratio, according to a note. Some 590 billion yuan ($84 billion) of MLF will mature by the end of September, Bloomberg-compiled data show.
Officials are probably aiming for a gradual shift in lending rates, as a drastic cut could be damaging to the financial sector, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp. Bank stocks opened lower Monday as analysts predicted lower rates will make lending less profitable.
“As this is a long-term structural change, it’s not necessary to change the loan prime rate dramatically in the near term,” said Xie. “In the end, banks will also try to protect their margins. If the cut is too aggressive, they will pay the cost.”
The PBOC said in a statement over the weekend that the 18 banks helping set the new rate should submit quotations in multiples of 5 basis points. The National Interbank Funding Center will cut the highest and the lowest and use the mean of the remaining 16.
(An earlier version of this story corrected the fourth paragraph to show the amount of loans coming due is in billions, not millions.)