China "Benchmark Interest Rate to Gradually Link with Market Interest Rates"

Chinese President Xi Jinping (Photo by Yonhap News)

[Asia Economy Reporter Moon Jiwon] China has announced its intention to gradually link the benchmark interest rate, which has been frozen for over four years, with market interest rates. This move is analyzed as a sign that China may consider using the benchmark interest rate cut card amid the recent economic downturn caused by the spread of the novel coronavirus (COVID-19).

On the 9th, the state-run Xinhua News Agency reported that the Central Committee of the Communist Party of China and the State Council jointly released a comprehensive market reform plan document, stating their position to gradually unify the benchmark deposit and lending rates with market interest rates.

According to the report, the Party and government explained, "The price discovery function of the government bond market must be strengthened," and "By better reflecting the market's supply and demand relationship in the government bond yield curve, the government bond yield curve should better serve as a benchmark in the price discovery process."

Since October 2015, China has maintained the one-year benchmark deposit rate and lending rate at 1.50% and 4.35%, respectively, for over four years.

However, there is analysis that China is considering the benchmark interest rate cut card, its most powerful monetary policy tool, to overcome the COVID-19 crisis.

Since the US-China trade war intensified, China has been increasing liquidity in the market by frequently lowering the reserve requirement ratio since last year amid a rapid economic slowdown, but it has not yet lowered the benchmark interest rate.

Because lowering the benchmark interest rate could cause side effects such as worsening debt problems and rising housing prices, China is showing a cautious attitude toward interest rate cuts.