China leaves loan rates steady for 17th consecutive month

SHANGHAI: China kept its benchmark lending rates unchanged for the 17th straight month in October on Tuesday, in line with market expectations.

WHY ​IT'S IMPORTANT

The steady loan prime rates (LPRs) suggest policymakers are in no rush to roll out fresh monetary easing after a strong third-quarter GDP outcome, as they focus on reforming the loan pricing framework and improving monetary policy transmission.

BY THE NUMBERS

The one-year loan prime rate (LPR) was kept at 3.00 per cent, and the five-year LPR was unchanged at 3.50 per cent.

In a ​Reuters survey of 22 market participants conducted on Monday, all participants predicted ⁠no change to either of the two rates.

CONTEXT

China's central bank is considering switching its main policy rate to the overnight reverse repurchase rate, in a shift aimed at improving the transmission of ‌monetary policy to support the economy.

The People's Bank of China will also issue policy guidance to advance reform of the loan pricing benchmark, shifting lending away from a relatively narrow reliance on the LPR toward a more diversified set of benchmarks, the bank's governor Pan Gongsheng said on Monday.

Some financially strong companies could opt for either the overnight reverse repo rate or the LPR as the benchmark for floating-rate loans, while the overnight rate could also serve as an alternative pricing benchmark for bonds and financial derivatives, Pan said.

China's economy expanded 4.5 per cent year-on-year in the third quarter, topping forecasts and reducing the urgency for Beijing to step up support to meet its annual growth target.

KEY QUOTES: Huatai Securities

"The latest announcement extends the shift in the policy rate anchor toward asset-side pricing, maintaining a gradual approach. The tiered design - giving large firms the option while keeping small and micro enterprises and individuals anchored to the LPR - is primarily aimed at avoiding a one-off shock to the existing pricing system."

"As more corporate loans are linked to the overnight repo rate, the rate's fluctuation range is likely to narrow, enhancing the stability of liquidity conditions."