China to scrap benchmark lending rate in shift to new system – Bloomberg

Bloomberg has reported over the weekend that "China’s central bank ordered lenders to adopt a new loan-pricing regime for all credit from next year, marking an end to the previous benchmark and another step toward liberalizing the financial system."

Lead paragraphs

"China’s central bank ordered lenders to adopt a new loan-pricing regime for all credit from next year, marking an end to the previous benchmark and another step toward liberalizing the financial system.

Financial institutions should stop using the old lending rate as the pricing reference for all credit from January, while gradually converting existing loans to a new base -- the loan prime rate -- from March to August, the People’s Bank of China said Saturday. The one-year lending rate had provided the previous anchor for loans across the economy."

FX implications

If anything, this could be regarded as a rate cut but in effect, it is making business loans cheaper, so should be seen a positive market-friendly measure and supportive of the economy and currency and unlike a traditional rate cut, subsequently buoy AUD crosses.

"The move could lower costs for some of the 152 trillion yuan ($21.7 trillion) in yuan-denominated outstanding loans held by financial institutions and boost economic growth," the article read, "even though it won’t involve a straightforward cut to interest rates. The LPR -- set at 4.15% for one-year tenor in December -- is lower than the benchmark rate at 4.35%."