This has been in the works for awhile
The PBOC announced on Saturday that financial institutions should stop using the one-year lending rate as its reference rate beginning January 1. Loans should also be gradually converted to the new benchmark -- the loan prime rate -- from March to August.
In effect, this will be a rate cut for some because the LPR is at 4.15% compared to the old benchmark at 4.35%.
China previously had a confusing system of maintaining benchmark rates that often resulted in ineffective transmission of rate cuts. The new system gives the PBOC a virtual direct line to business and consumer loans.
The old system used reverse repos and the medium-term lending facility to manage funding to banks while setting one-year and five-year lending rates. The PBOC will retain flexibility on reserve requirements.
The new system makes the LPR the pre-eminent rate.
