Business Insider Edition

China's central bank just took the next step in arming itself for the global trade war

Ben Winck , Business Insider US
 Aug 21, 2019, 02:13 PM
china, US
  • China's central bank rolled out a new policy for its loan prime rate - the lowest lending rate reserved for its best borrowers - that will allow commercial lenders to use the rate when pricing loans.
  • The move effectively allows more consumers, banks, and businesses to use the country's lowest interest rate and, in turn, boost domestic spending.
  • The move comes after China posted its slowest economic expansion rate in 27 years and the US-China trade war continues, despite reports of President Trump considering reversing some tariffs.
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The People's Bank of China has shifted its policy on commercial lending in an effort to push interest rates lower and boost domestic spending.

China's central bank employs a variety of policies to adjust money supply and lending rates. Among those tools is the loan prime rate, an interest rate reserved for the least risky and most creditworthy borrowers. The People's Bank announced Saturday it would modify its LPR to help lower borrowing costs for companies.

Future commercial lending quotes will be tied to the LPR, and 18 financial institutions will have access to the LPR, up from 10, according to the PBOC. The shift comes after China's economy slowed to its lowest growth rate in 27 years, and while some reports suggest the Trump administration is considering a deescalation of the conflict, additional tariffs on Chinese goods are still set to hit in September.

"By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower real lending rates," the bank said in an online statement.

The central bank recently allowed the Chinese yuan to drop below seven-per-dollar, a key psychological level it had previously maintained. The act signaled China was preparing for a prolonged trade war, as a weaker currency helps lower exports' prices for other countries.

The bank's new lending policy isn't as closely related to international trade, but still represents a method for strengthening its economy ahead of additional pressures.

Tuesday marked the first day the reforms took hold, and the one-year loan prime rate fell to 4.25% from the previous 4.31%. While the cut should theoretically encourage lending by businesses, banks and consumers, the policy's impact will likely be "very muted," UBS analyst Tao Wang told CNBC Monday.

"Companies are worried about uncertainties related to trade dispute, slower economy - so even lowering the rates may not actually be able to stimulate a lot of credit demand," Wang said. "I would say the ... stimulative impact on the economy, I think it's very muted."

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