Interest Rate Reform Takes a Step Forward

Caixin: Central Bank Reveals First Step to Unifying Benchmark, Market Rates
China’s interest rate liberalization is now focused on unifying the “two tracks” of lending rates, the People’s Bank of China (PBOC) said Friday in its latest quarterly report.

The report’s release marks the first time that the central bank has signaled how it will unify the two tracks — one is benchmark rates set by the bank, while the other refers to the ones chiefly set by the market. The PBOC looks likely to first try to merge lending rates instead of deposit rates.

Although benchmark rates are reference rates that are no longer compulsory, they continue to loom large in the minds of bankers and borrowers. Combining benchmark and market-based lending interest rates allows commercial banks to price loans on their own, with lower rates for lower-risk companies and vice versa. This can help enhance market competition, the PBOC said in the report (link in Chinese).

The merging of interest rates sits at the core of China’s interest rate liberalization, which in turn is one of the key reforms to the country’s financial sector.
It's a good bet that banks won't set loan rates based on risk until after the next financial system reset.

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