Loan Preferential Interest Rate Down 0.1%p... China Lowers 'De Facto Benchmark Interest Rate'

1-Year Maturity Preferential Interest Rate Lowered to 4.05%

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kwon Jaehee] On the 20th, China lowered the 1-year maturity Loan Prime Rate (LPR), which effectively serves as the benchmark interest rate, by 10 basis points (bp = 0.01%) from the previous month to 4.05%. The 5-year LPR was also reduced by 5 bp to 4.75% compared to the previous month.

This LPR cut is the first in three months since last November and is interpreted as an economic stimulus measure amid the unavoidable shock to the Chinese economy caused by the spread of the novel coronavirus (COVID-19).

The People's Bank of China's official 1-year benchmark lending rate remains at 4.35%. However, since all financial institutions in China must use the LPR as the lending benchmark, the LPR effectively functions as the actual lending benchmark rate.

Initially, many inside and outside China expected the Chinese economy to easily achieve around 6.0% growth this year, similar to last year's 6.1%, supported by the Phase One US-China trade agreement and other factors.

However, as concerns grew that the COVID-19 outbreak could cause a greater shock than the 2003 Severe Acute Respiratory Syndrome (SARS) epidemic, some pessimistic views emerged suggesting that this year's economic growth rate could fall below 5%. Morgan Stanley forecasted on the same day that China's economic growth rate could drop to 3.5% in the first quarter and 5.6% for the entire year.

In the quarterly monetary policy report released the previous night, the People's Bank of China directly mentioned the COVID-19 situation and announced that it would actively fulfill the central bank's role in stabilizing the economy.

The People's Bank of China stated, "We will further innovate monetary policy tools and strengthen lending support for epidemic prevention-related sectors and local governments," adding, "We will hold the capability to adjust the economy and enhance the flexibility of monetary policy going forward."