Will Financing Costs for SMEs Finally Drop?

Reuters: China unveils rate reform to steer funding costs lower for firms

The People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.

Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.

“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower real lending rates,” the PBOC said in a statement published on its website.

Every effort to lower borrowing costs has failed. Every effort to steer capital away from zombie industries and real estate speculation has failed. That is the reality, not a prediction. This is a crucial moment for the economy.

iFeng: 重磅！央行降低贷款利率出大招 今后贷款更容易了

Financing Difficulties? Interest rate "two tracks and one track" needs to be promoted

The relevant person in charge of the central bank pointed out that at present, the upper and lower limits of China's loan interest rates have been liberalized, but the deposit and loan benchmark interest rates are still retained, and there is a problem of “interest rate double track” where the loan benchmark interest rate and market interest rate coexist. When banks issue loans, most of them still refer to the benchmark interest rate of the loan. In particular, individual banks set a hidden lower limit by a certain multiple of the benchmark interest rate (such as 0.9 times) through coordinated actions, which hinders the transmission of market interest rates to the real economy. An important reason for the obvious downward trend in interest rates but the lack of experience in the real economy is the core issue that needs to be urgently resolved in the current market-based interest rate reform.

"The main measures for this reform are to improve the formation mechanism of the loan market interest rate (LPR), improve the marketization degree of LPR, play a good guiding role of LPR on the loan interest rate, promote the loan interest rate 'two tracks and one track', and improve interest rate transmission. Efficiency, and promote the reduction of financing costs in the real economy," said the person in charge.

Dong Xiwei, vice president of Chongyang Financial Research Institute of Renmin University of China, told the China-China Jingwei client that due to the existence of interest rate “two tracks”, on the one hand, policy interest rates are difficult to be effectively transmitted among financial sub-markets such as currency, bonds and credit, affecting interest rate transmission. The effect is not conducive to the realization of monetary policy objectives; on the other hand, the pricing of financial products is difficult to accurately reflect the market interest rate in a timely manner, which is not conducive to the flow of funds from financial institutions to the real economy, affecting the efficiency of financial resource allocation. Therefore, we must actively and steadily push forward the interest rate "two tracks and one track" work.

Take more measures to reduce the actual interest rate of loans

The National Convention meeting held on the 16th pointed out that since the beginning of this year, all parties concerned have made active efforts, and the overall financing interest rate of the whole society has generally stabilized and declined. We must continue to maintain this situation, especially in the face of the current situation. We must maintain a reasonable and sufficient liquidity, adhere to the reform measures, promote a significant decline in the real interest rate, and work hard to solve the problem of “funding difficulties”.

The relevant person in charge of the central bank said that by reforming and improving the LPR formation mechanism, it is possible to use the market-oriented reform measures to promote the effect of lowering the actual interest rate of loans.

The person in charge said that first, the overall market interest rate in the previous period will be larger, and the LPR formation mechanism will be more reflective of the decline in market interest rates. Second, the new LPR is more market-oriented, and it is difficult for banks to coordinate the implicit lower limit of the loan interest rate. Breaking the implicit lower limit can cause the loan interest rate to decline. The regulatory authorities and the market interest rate pricing self-regulatory mechanism will supervise the banks, and the enterprise can report the bank's behavior of setting the implicit lower limit of the loan interest rate. The third is to explicitly require banks to refer to LPR pricing in newly issued loans, and use LPR as a pricing benchmark in floating-rate loan contracts. In order to ensure a smooth transition, the stock loan is still executed as originally agreed. Fourth, the People's Bank of China will incorporate the bank's LPR application and loan interest rate competition into a macro-prudential assessment (MPA) to urge banks to use LPR pricing.

For more measures to reduce corporate financing costs and loan interest rates, the relevant person in charge of the central bank said that the central bank will also take various measures with relevant departments to effectively reduce the comprehensive financing costs of enterprises. The first is to promote open and transparent credit rates and fees. Strictly regulate the fees and charges of financial institutions, and urge intermediaries to reduce fees and make profits. The second is to strengthen positive incentives and assessments, strengthen credit support for orders and credit companies, and better serve the real economy. The third is to strengthen multi-sectoral communication and coordination, form a policy synergy, and promote multiple measures to reduce the cost of corporate financing and other channels.

Global interest rate cuts look forward to the direction of domestic monetary policy

In early August, the central bank issued the China Monetary Policy Implementation Report for the second quarter of 2019. The report carried out a more comprehensive inventory of China's monetary policy implementation in the first half of the year. From the perspective of monetary policy, the report pointed out that a prudent monetary policy should be tight and moderate, maintain a reasonable liquidity, and implement counter-cyclical adjustments in a timely and appropriate manner to guide the broad-based monetary growth rate of M2 and social financing to match the nominal GDP growth rate.

Since the Fed cut interest rates, many central banks around the world have joined the “reduction of interest rate camps”. 28 countries or regions have chosen to cut interest rates to varying degrees, and have also strengthened domestic expectations for monetary policy liberalization. Looking forward to the direction of domestic monetary policy in the second half of the year, Dong Xizhen believes that China's monetary policy will still adhere to the stable main tone, maintain a moderate degree of flexibility, use a variety of monetary policy tools, and increase the frequency of pre-adjustment and fine-tuning, but there will be no “big flood irrigation”. "The situation." From the perspective of risk prevention, it does not support the further easing of monetary policy. At the same time, the deposit reserve ratio still has a certain room for downward adjustment, but the possibility of targeted RRR reduction is even greater. Dong Xizhen believes that as for the reduction of the benchmark interest rate for deposits and loans, the possibility is not high in the short term.