MNI POLICY: New LPR Reform Not To Replace Policy Moves: PBOC

     BEIJING (MNI) - The People's Bank of China played down the weekend

reforming of the lending rate formation system as a rate cut, saying it was an

incentive to smooth monetary policy transmission, the central bank told

reporters Tuesday.

     Here is the major points of the briefing held by Liu Guoqing, vice-governor

of the PBOC, and Sun Guofeng, the head of the bank's monetary policy department.

     -Reform cannot replace moves in monetary policy and other policies, but it

will help the already-low money market rates transmit to lending rates across

the real economy. The liquidity situation is overall decided by PBOC action, Liu

said, noting the reform is to optimize the system, not policy replacement.

     -The latest reform took notice of both domestic and external conditions.

China's economy is facing new challenges from trade conflicts and industrial

upgrades, so there is a need to improve monetary policy transmission. China is

the only country among the major economies to conduct normal monetary policy at

present, as most central banks are in an easing cycle, Liu said. 

     -He noted China is still far from launching extraordinary policy as there

is no deflation and the money market are at a basically reasonable level after

recent falls.

     -There is a space for further RRR cut, but not as large as market

expectation, Sun said. The reserve requirement ratio in China averages at 11%,

lower than other developing countries, so the reduction in the future is

limited.

     -Reform does not involve money market rates but loans rates, so it would

not impact the yuan directly. Market expectation for the currency is stable,

even after the yuan broke above 7. China has confidence to maintain its currency

at a reasonable and balanced level considering the assessed value of the yuan

assets is still low and the current spread between China and US interest rates

is in a "comfortable" range.

     -The new prime rate will be set according to the lending rates of the best

quality clients of the quoting banks and regulators would crack down on any

intention of lenders to set an "implicit bottom", which will lower the price,

even though some banks serving small businesses have been included. The new

system will effectively increase lending to small business and lower lending

cost.

     -The reforms will narrow the interest margin of commercial banks in the

short term as the deposit rates have not been changed, but it would improve the

capacity of lenders to set prices and their overall competitiveness. In the long

run, it will boost the real economy, increase lenders' clients and reduce bad

loans, forming a "virtuous cycle" between the financial sector and the real

economy.

     -The newly-added 'over 5-year duration' prime rate will not reduce mortgage

rates. The regulators will continue to curb speculation in the property market,

ensuring  mortgage lending doesn't pick up and rates do not fall

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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