25 January 2020

The Big Picture: RATE REFORM

The launch of a new benchmark lending rate, or the so-called loan prime rate, represents another breakthrough in pushing forward rate liberalization in China. By setting the lending rate to the banks’ best customers, market-driven demand and supply in funding will be reflected better, helping enhance the efficiency of capital allocation which Premier Li Keqiang had urged in June. Currently, only a one-year rate will be calculated and published on the Shanghai Interbank Offered Rate website. The one-year loan prime rate was set at 5.71 percent on Friday, compared with 6 percent for the central bank’s current benchmark one-year loans rate. For quality investors and customers, the benchmark lending rate can help them get a better deal from banks as the mechanism will lift the transparency of lending activities. For banks, the move could further squeeze their interest margins as they may need to be more competitive in pricing their loans to retain and attract their customers. The loan prime rate is calculated every working day based on a weighted average of rates given by nine domestic lenders including Industrial and Commercial Bank of China (01398.HK; 601398.SH), Agricultural Bank of China (01288.HK; 601288.SH) and Bank of China (03988.HK; 601988.SH).

Social investment: China, which is seeking to upgrade its economic structure, is stepping up efforts to eliminate government red tape in order to encourage more private investment and boost employment. In a fresh move, Premier Li decided at a State Council meeting Friday to streamline the nation’s corporate registration system. Requirements for minimum registered capital for limited liability companies, one-person limited liability companies, as well as joint-stock companies with limited liability, will be scrapped. China has offered tax incentives and cut approval procedures to create a more friendly business environment to encourage people to start their own businesses, as a record number of college graduates flood the job market. At the end of September, China’s urban registered unemployment rate was at 4.04 percent, down from the end-June level of 4.1 percent.

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