MNI POLICY: PBOC Sets Loan Prime Rate 5 Bps Lower At 4.20%

     BEIJING (MNI) - The People's Bank of China edged its Loan Prime Rate lower

Friday, as it continues aiming to reduce companies' borrowing costs to cushion

the impact of the economic slowdown.

     The one-year LPR, the new reference rate for bank loans, was set at 4.20%

from 4.25% last month, with the 5-year set at 4.85%, unchanged from August.

     The one-year prime rate now sits 15 bps below the benchmark loan rate with

the same duration at 4.35% and 5 bps lower than its five-year counterpart at

4.90%.

     The PBOC announced the reform of its interest rate formation system in

mid-August. Under the new regime, LPR pricing will be linked to the rate of

one-year medium-term lending facility, a rate that is viewed as being closer to

market rates for credit and will help lower the cost of borrowing for private

companies.

     The PBOC did not amend the MLF rate this Tuesday, against market's

expectation, and has shown no immediate reaction to the U.S. Federal Reserve's

latest 25 bps rate cut.

     However, the central bank has increased liquidity injections into the

banking system. On Friday, it continued to pump a net of CNY120 billion via its

open market operations (OMOs), after net injecting CNY170 billion via OMOs

yesterday, which was the biggest daily injection since May 29.

     An MNI Exclusive on Sept 12 suggested the PBOC would, for now at least,

allow banks to hold onto more cash to reduce the loan rate quotes from the 18

designated lenders used to calculate the prime rate, rather than cut policy

rates, leaving itself ammunition for further stimulus if necessary later this

year.

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

--MNI Beijing Bureau; +86 (10) 8532-5998; email: wanxia.lin@marketnews.com

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