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China central bank reforms mechanism for loan prime rate

The People's Bank of China is reforming the mechanism used to establish the loan prime rate, a move aimed at lowering borrowing costs for companies, Reuters reported Aug. 17.

The central bank said it is improving the formation mechanism of the loan prime rate, or LPR, to help lower real lending rates. Chinese banks will now use rates of open market operations to determine their new LPR quotations, the PBOC said in a statement published on its website.

Banks will be prohibited from setting any implicit floor on lending rates in a coordinated way, and are directed to mainly refer to LPR when setting floating lending rates. There will be five-year and longer tenors added to the existing one-year LPR in order to help banks set rates on longer-term loans.

In addition, eight small banks, including two foreign-funded banks, will be added to the list of banks allowed to submit LPR quotations. Currently, there are only 10 nationwide banks that can submit LPR quotations.

The national interbank funding center will publish the rate from Aug. 20.