August 27, 2019

Chart of the Week: China reforms lending rate in latest bid to support struggling firms

by Fathom Consulting.

As the economy slows and the proportion of loss-making firms rises, China reformed one of its lending rates — the Loan Prime Rate (LPR) — earlier this month. The new LPR is based on the average of 18 banks’ submissions, excluding the highest and lowest. These submissions are to be based on “adding a few basis points to the interest rate of open market operations (mainly referring to the rate of the medium-term lending facility).” The PBoC stipulated that new bank loans should be priced in line with the LPR to help push borrowing costs down towards the medium-term lending facility rate. This will shift the blue line closer to the orange line in the chart below, as borrowers gain access to loan rates which more closely reflect the funding conditions of the banking system, regardless of their creditworthiness. This is just one tactic, among many, that China is using to combat the impact of Donald Trump’s trade tariffs. As we discussed in a recent News in Charts, renminbi depreciation is another approach used by China’s policymakers.

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