FAST FIVE: China Unveils Its Own Libor: How China's Interest Rate Reform Will Work
On August 17, China's central bank unveiled detailed measures on its long-awaited interest rate reform by establishing a reference rate for new loans issued by banks to help steer corporate borrowing costs lower and support a slowing economy.
Somewhat similar to Libor, eighteen reference banks are asked to report to the National Interbank Center interest rates based on Open Market Operation rates (mainly MLF rates) with additional premiums before 9 am on the 20th of each month.
Furthermore, while it is geared toward boosting lending and ushering in lower rates, the new system itself doesn't guarantee the actual lending rate will be lower.
Under the reforms announced on Saturday, the new LPR will be linked to rates set during open market operations, namely the PBOC's medium-term lending facility (MLF), which is determined by broader financial system demand for central bank liquidity.
Ming Ming, head of fixed income research at CITIC Securities in Beijing, expects the first new rate to be set lower to narrow the yield gap between LPR and interest rate on the MLF, which is now 3.3% for one-year loans.