China banks, following central bank, lower costs of borrowing

Shanghai

CHINESE banks lowered the benchmark rate for new loans, following a series of policy-loosening steps by the central bank aimed at cushioning the economic impact of the coronavirus outbreak.

The one-year loan prime rate (LPR) was set at 3.85 per cent versus 4.05 per cent in March, according to a statement from the People's Bank of China on Monday. Some analysts had expected a cut of 20 basis points after the central bank trimmed several of its policy rates since the last LPR was set in March, and added liquidity to the financial system. The five-year tenor, a reference for mortgages, was cut to 4.65 per cent on Monday versus 4.75 per cent in March.

The rate cuts come after China last week lowered the cost it charges on its one-year funding to banks to a record low. The central bank also cut the cost of short-term open market operations in late March by the most since 2015, and announced a two-phase cut to the reserve ratio requirement for smaller banks. Data on Friday showed gross domestic product shrank the most on a quarterly basis since at least 1992.

Hours after the economic reports, the country's leaders pledged to deliver more stimulus including interest rate cuts to boost domestic demand. Authorities will keep liquidity "reasonably ample" by cutting the amount of reserves banks need to hold, China Central Television reported after a meeting chaired by President Xi Jinping.

The LPR has been considered China's de facto benchmark funding cost since a reform last year. The rate decided by a group of 18 banks is released on or around the 20th of every month and is reported in the form of a spread over the interest rate of the central bank's medium-term loans.

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The steady decline in the LPR since August last year has led to lower borrowing costs in the wider economy. The rate was last reduced by 10 basis points in February. BLOOMBERG