Morgan Stanley said China's Loan Prime Rate (LPR) reform may lead to a de facto rate cut in the near term, underscoring policymakers' incremental easing efforts.
But the support for credit growth could be relatively mild and cannot fully offset growth drags. Over the long run, the research house believes LPR could be more market-determined.
Echoing the State Council's pledge to ease corporate borrowing costs on 16 August, the PBoC announced a new pricing mechanism for the LPR on 17 August, stating that "it will be able to use market-based reform methods to help lower real lending rates by reforming and improving the formation mechanism of LPR."
Banks must take LPR rather than the traditional benchmark lending rate as the benchmark for setting new loan rates and will be barred from setting any implicit floor on lending rates in a coordinated way.
Under the new mechanism, 18 participating banks will submit to the central bank each month the loan rates to their best clients, which are tied to a rate of PBOC-controlled open market operations, mainly medium-term lending facility (MLF). The LPR will be published every month on the 20th, effective from August 20.
Morgan believes policymakers have two goals in their interest-rate reforms: to lower companies' funding costs as the economy slows in the near term while unclogging the transmission of monetary policy in the long term.
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