China introduces market driven lending rate to boost cheap funding for businesses


China’s central bank on Saturday announced a market based interest-rate mechanism to reduce financing costs for businesses struggling due to economic slowdown.

The People's Bank of China said in a statement on Saturday that under the new system, a club of 18 lenders  will submit their one-year and five-year loan prime rates (LPR) – the lowest rate offered to their best clients – to the central bank on a monthly basis.

The central bank will then calculate the average of the rates received and publish it at 9.30am on the 20th of every month, starting from Tuesday. That would the benchmark rate for the banking industry.

China's central bank policy adviser was out on the wires earlier today stating that the new loan prime rate will be linked to medium-term lending facility rate.

Beijing's decision to revamp rates system is expected to spur small businesses. The new reference for bank loans, however, is unlikely to influence USD/CNY and the Chinese currency could continue to take cues from the daily CNY reference rate.

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