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S&P: China likely to lower corporate borrowing costs further after rate reform

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S&P: China likely to lower corporate borrowing costs further after rate reform

China's central bank is likely to roll out additional measures aimed at lowering corporate funding costs following a move to revamp its prime rate mechanism through a market-driven approach, S&P Global Ratings said.

"We expect the People's Bank of China to adopt more measures to reduce corporate funding costs in the next few months, including further lowering the one-year medium-term lending facility (MLF) rate," primary credit analyst Cindy Huang wrote in a report.

On Aug. 20, the Chinese central bank set the one-year loan prime rate, or LPR, at 4.25%, down 6 basis points from the previous LPR and lower than the official benchmark lending rate of 4.35%.

"In our view, the LPR's reference rate on the MLF is still not a full market-oriented rate, given that the MLF rate is a policy rate and does not fully reflect changes in banks' wholesale funding costs," Ratings said.

"However, it is an improvement and reflects the PBOC's willingness to improve the transmission efficiency of the policy rate," Huang said.

Funding costs for privately owned enterprises may not improve much as the rate only applies to new loans, while borrowing demand from private firms is not anticipated to increase significantly, she said. Meanwhile, the new five-year LPR, set at 4.85%, is unlikely to have a significant impact on corporates as most companies' borrowings span less than five years, she said.