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China unveils more market-oriented lending rate

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BEIJING, Oct. 25 (Xinhua) -- China's central bank on Friday announced the launch of Loan Prime Rate (LPR), a new benchmark lending rate for commercial banks designed to make interest rates more market-oriented.

The People's Bank of China (PBOC) said in a statement that LPR is based on lending rates reported each working day by nine commercial banks designated by the central bank.

The nine include the country's five state-owned banks and another four Chinese banks -- China Citic Bank, Shanghai Pudong Development Bank, Industrial Bank and China Merchants Bank.

Each working day, those banks are required to report lending rates for their best customers to the central bank, which will then calculate the weighted average after excluding the highest and lowest rates to form the LPR, the central bank said.

In the initial stage, the central bank will only release the one-year LPR to the public on the website of the Shanghai Interbank Offered Rate.

The one-year LPR for Friday stood at 5.71 percent, slightly lower than the current benchmark one-year lending rate of 6 percent, which was unveiled by the PBOC in July 2012.

Previously, the central bank would raise or lower the benchmark deposit and lending rates from time to time based on changing market situations.

The PBOC said in the statement that for smooth transition to the new mechanism, it will continue to announce changes in the benchmark rates for an unspecified period of time.

The one-year LPR will serve as a new benchmark for commercial banks to decide other lending rates, according to the statement.

The LPR mechanism is a significant part of the central bank's move to push for market-oriented interest rate formation.

"The mechanism is conducive to raising the efficiency and transparency in pricing credit products of financial institutions and promoting banks' capability of independent pricing," the statement said.

The central bank added that the new mechanism will make interest rate formation more rational and thus be good for maintaining market order.

In July, the PBOC announced a major move to liberalize bank lending rates, taking measures including scrapping the the floor limit of lending rates and allowing financial institutions to decide their own rates.

"But the independent pricing of commercial banks is not mature at present, and there is likely to be problems like vicious competition and a state of disorder," said Guo Tianyong, a professor with the Central University of Finance and Economics.

The LPR will serve as the reference for commercial banks to decide their lending rate, and so "it is beneficial for forming a scientific and reasonable interest rate formation system," Guo said.

Xu Gao, an analyst with Everbright Securities, said the LPR mechanism marks a new step for China's reform toward market-oriented interest rate formation.

However, experts believe the new mechanism will have limited impacts on the financial market in the short term.

"The LPR mechanism will pose a challenge for the central bank's monetary control," Guo said, adding that the PBOC should begin to consider how to pass its regulatory intentions to the market base on the LPR.

Xu also said that it will take a long time for the market to get a sense of the PBOC's intentions from the LPR mechanism.

Over a relatively long period of time, the central bank's intention to raise or lower market rates can only be realized through changes to the benchmark deposit and lending rates in the previously existing mechanism, according to Xu.

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