China's new lending reference rate set slightly lower at 4.25%

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MLF rates are generally seen as the rates banks pay for their funding and are determined through the central bank's open market operations bidding process. Indeed, existing loans including mortgages are still exempt from the new benchmark scheme. It has stayed near 4.3% - nearly the same as the one-year benchmark lending rate of 4.35%. Around late afternoon, the 225-issue Nikkei Stock Average rose 86.48 points, or 0.42%, to 20,649.64, while the broader Topix index of all First Section issues on the Tokyo Stock Exchange added 8.08 points, or 0.54%, at 1,502.41.

It said it will "deepen market-based interest rate reform, improve the efficiency of interest rate transmission, and lower financing costs of the real economy".

Some market participants expect the central bank to cut the interest rate on one-year MLF, as that could essentially bring the LPR down further.

As China's economic growth has slowed amid an escalating US trade war and sluggish domestic demand, regulators want to boost the economy by lowering borrowing costs for companies, particularly private firms and small and midsize enterprises (SMEs). PBOC said the national interbank funding center will be authorized to publish the rate starting August 20.

China decreased its new lending reference rate barely on Tuesday, as expected, as the nation's central bank revealed a new rate of interest reforms created to reduce corporate borrowing prices.

The LPR, originally introduced by the PBOC in October 2013, is an interest rate that commercial banks charge their best clients and was meant to better reflect market demand for funds than the benchmark the PBOC sets.

She also expects a 5-10 basis point cut in the 1-year MLF rate. "A decline of only a few basis points is small".

The move by the PBOC is created to steer corporate borrowing costs lower and support a slowing economy.

The ultimate aim is to unify two interest rates-market-based rates and benchmark rates.

A report by Guotai Junan Securities Co. Ltd. said one can't consider it a "quasi-rate cut" unless the one-year national LPR falls lower than 90% of the official benchmark rate - or below 3.915% - the implicit floor on some commercial banks' loan rates. Lower interest rates would help private and small and medium sized enterprises obtain much needed funding. Economists from UBS said "the new LPR system may benefit more large companies that have stronger bargaining power vis-à-vis the banks than SMEs". If these loans are rolled over, the PBOC could lower the rate, opening the door to an LPR cut.

As well as a likely hit to lenders' margins, it will push them to increase their risk tolerance when it comes to underwriting loans, according to Moody's Investors Services.

The pressure on banks will finally be transmitted to borrowers, some analysts said.

He also said the PBOC would need to take other steps, including cuts to medium-term liquidity rates, if it wants to continue reducing the LPR to lower funding costs for banks.



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