August 19, 2019 / 4:42 AM / 4 months ago

Breakingviews - China’s rate reform inches along the market path

A customer counts Chinese Yuan notes at a market in Beijing, August 12, 2015. China shocked global markets on Tuesday by devaluing its currency after a run of poor economic data, a move it billed as a free-market reform but which some experts suspect could be the beginning of a longer-term slide in the exchange rate. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - China’s lending policy is inching along the path to market. The central bank’s latest move to reform the way mainland interest rates are set pushes aside a long-standing benchmark decided by officials. It’s an overdue step designed to ease credit conditions and help companies borrow. Transmission problems remain, but a move closer to a more responsive system is welcome.

The People’s Bank of China has in recent months seemed frustrated: despite efforts to nudge down what institutions like Bank of Communications and China Merchants Bank pay for funds, average loan rates declined only modestly. Part of the problem seemed to be that lenders continued to use an old benchmark lending rate to price loans – a measure unchanged at 4.35% since 2015 – despite efforts several years ago to move away from it. That led to speculation that fed-up officials might slash that figure, delivering instant relief to a cooling economy.

Instead, officials took a different step on Saturday, enhancing the “loan prime rate” which will now replace the old benchmark. It will be established mainly in reference to the one-year medium-term lending facility rate, which is more market-oriented but still controlled by the PBOC. That in turn should allow policymakers to more effectively bring down costs for companies and individuals.

There’s reason for scepticism. The change won’t fix deep-seated factors that hampered the transmission of monetary policy – such as worries about losses incurred from government-mandated lending to small firms. Instead, it somewhat sidesteps them. It could allow the PBOC to claw back influence over loan prices, in spite of earlier liberalisation efforts.

All the same, it counts as progress. Banks will probably be forced to price their loans more dynamically. Among the plethora of quasi-policy rates, attention may start to converge on one. Policymakers will have a more efficient tool to influence borrowing costs in the real world. The path is now clear for them to cut lending rates later this year. They’re likely to take it.

Breakingviews

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