Central banks are cutting interest rates to stimulate economic growth. India, Australia and Thailand have announced rate cuts over the last two months.
In China, Premier Li Keqiang has unveiled a reform aimed at lowering funding costs for small businesses.
Effective from Tuesday, the loan prime rate (LPR) mechanism will be made more market-driven.
Set up in 2015, the LPR mechanism is based on lending rate quotations submitted by the country’s top 10 lenders.
There are two problems.
First, the 10 banks do not include smaller but more active lenders to small and medium-scale businesses, such as city commercial banks.
Second, these top lenders are said to be typically working together to set a lower limit for the lending rates.
In fact, mainland banks tend to favor state-owned enterprises as loan customers. Private sector firms usually need to pay higher loan costs, even if they have operating track record, cash flow or collateral comparable with that of their counterparts in the state sector.
To create a more representative and market-driven benchmark and help small companies cut financing costs, Premier Li announced the reform last Friday.
Eight banks will be added to the LPR submission list, including two city commercial banks, two private banks (WeBank and MyBank), two rural commercial banks and two foreign banks (Citigroup and Standard Chartered).
Banks will also be barred from setting any implicit floor on lending rates in a coordinated way.
Small businesses in China are paying 6 to 7 percent annual interest on bank loans on average.
Li wants to have it lowered by one percentage point within this year. If the LPR reform is not enough to achieve that, apparently, additional measures would have to be taken.
This article appeared in the Hong Kong Economic Journal on Aug 19
Translation by Julie Zhu
[Chinese version 中文版]
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