Reform of the loan prime rate makes significant progress

A majority of the banks in China have started using the Loan Prime Rate as the benchmark for new lending this year, marking a milestone in the country's interest rate reform, according to the People's Bank of China.

LPR is formed based on 18 qualified commercial banks' lending rates for their best clients and equals the medium-term lending facility rate, or the MLF, plus a risk premium. The one-year and five-year LPR are updated on the 20th of every month.

According to a central bank report, the loan prime rate reform, which started in August 2019, has improved independent pricing capabilities of financial institutions and the transmission efficiency of market interest rates.

Besides, central bank officials said to China Daily that by eliminating the banks' invisible floor of lending rates, the LPR reform helps to cut financing costs for the real economy.

The market-oriented mechanism has greatly improved efficiency of country's monetary policy, and also helped in the liberalization of deposit rates, as banks have adjusted the lower deposit rates to match the falling lending rates, officials said.