The move is likely to be part of an economic stimulus measure following a slowdown in the Chinese economy. The move could enflare the rising bad debt, like it has in past instances of fiscal stimulus measures.
On Saturday, in a move aimed at further lowering interest rates, China’s central bank stated, it will “improve the mechanism used to establish the loan prime rate (LPR)”.
According to a statement from the People’s Bank of China (PBOC), LPR quotations will be based on rates quoted in the open market; the national interbank funding center has been authorized to publish the rates from August 20.
Chinese banks can now set new loan rates using the LPR as the benchmark for setting floating lending rates, said the PBOC. It went on to add, banks will be barred from setting any hidden floor on lending rates.
The development comes in the wake of China’s State Council statement that it will increasingly move towards market-based reforms to help lower real interest rates for companies.