China's market-oriented lending interest rate reform has shown its effectiveness, as the new loan prime rate (LPR)—a recently reformed benchmark that shows real borrowing cost—edged down, on its way to strengthening credit support for the real economy.

The one-year LPR came in at 4.15 percent on November 20, down from 4.2 percent a month earlier. The rate for above-five-year LPR stood at 4.8 percent, down from 4.85 percent for the prior month, according to the National Interbank Funding Center.

This is the fourth release of the reformed LPR since the interest rate mechanism was revamped in August.

Both the one-year and above-five-year LPRs fell 5 basis points from the previous release, in line with the central bank's move on November 5 to cut the rate of one-year medium-term lending facility (MLF), a monetary policy tool which reflects the central bank's lending price to commercial banks, by 5 basis points, said Wen Bin, chief researcher with China Minsheng Bank.

"This indicates the central bank's policy interest rate changes will have a more direct and effective impact on LPR changes," Wen said.

The reformed LPR mechanism reflects the reported loan rates from 18 representative banks' best clients. After reform, the quote became more market-based as the quoting banks added a few basis points to the interest rates of open market operations, which mainly refer to the MLF rates, according to the central bank.

After the MLF operation, the central bank cut the seven-day reverse repo rate, a key interbank interest rate, by 5 basis points on November 18, to 2.5 percent from 2.55 percent, the first such cut in four years.

In addition, the two key open market policy interest rates fell in November, supplemented by appropriate liquidity injection, effectively guiding the market interest rates and LPRs down, and will further drive down the loan interest rates for enterprises in the future, said Wang Qing, a chief macroeconomy analyst with Golden Credit Rating International.

China has made breakthroughs in interest rate liberalization this year. The reformed LPR formation mechanism will help lower the real lending rates since it will be more market-based, thus making it difficult for banks to set an implicit interest rate floor for loans, and the breaking of the implicit floor, in turn, will prompt lending rates to drop, the central bank explained in a statement.

The interest rate of newly-issued enterprise loans in September dropped by 0.36 percentage point from a high in 2018, reflecting the policy effect of lowering the real interest rate of loans by means of market-oriented reform, according to the central bank.

The LPR, introduced in October 2013, was meant to better reflect market demand for funds compared to the benchmark rate. In the revamp, the LPR is set on around the 20th of each month, instead of on a daily basis.

In addition to the previous one-year maturity, the reformed LPR also covers the maturity longer than five years, which serves as a pricing reference for bank's long-term loans such as housing mortgages, according to the central bank.

On November 20, the above-five-year LPR shrank for the first time since the reform was implemented. Since the interest rates on new commercial personal home loans are linked to the above-five-year LPR, the reduction of the above-five-year LPR by 5 basis points will also help reduce the mortgage cost for new home buyers, Wen said.

The drop of above-five-year LPR is not the same as the loosening of mortgage policy, but mainly aims to reduce the financing costs of medium- and long-term loans for enterprises, said Chen Ji, an analyst with the Bank of Communications.

On November 19, Governor of the People's Bank of China Yi Gang held a meeting with executives of financial institutions. A statement issued after the meeting said financial institutions should enhance counter-cyclical adjustments and beef up credit support for the real economy.

This is an edited excerpt of an article originally published by Xinhua News Agency

Copyedited by Rebeca Toledo

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