Interest Rate Marketization Takes Center Stage at Central Financial Work Conference
At the recent Central Financial Work Conference, deepening the structural reform of the financial supply side, particularly through interest rate marketization, was highlighted as a top priority. The People’s Bank of China (PBOC) has pledged to implement the directives of General Secretary Xi Jinping and the conference, with a focus on serving the real economy and improving the market-based reform of interest rates.
The efforts to promote interest rate marketization have already yielded positive results. One key aspect is the reform of the loan prime rate (LPR). Since the LPR quotation formation mechanism was reformed in August 2019, the 1-year LPR and the 5-year and above LPR have decreased by 0.8 and 0.65 percentage points, respectively. This has led to a decline in the weighted average interest rate of corporate loans from 5.32% in July 2019 to 3.82% in September 2023, the lowest level on record.
Another important achievement is the establishment of a market-based adjustment mechanism for deposit interest rates. The PBOC guided the introduction of this mechanism in April 2022, leading to major financial institutions voluntarily lowering deposit interest rates three times in September 2022, June and September 2023. The marketization of deposit interest rates was significantly improved, with the weighted average interest rate of new time deposits decreasing by 0.4 percentage points from April 2022.
In addition to these achievements, the PBOC has also made efforts to timely adjust and optimize housing loan interest rate policies. A dynamic adjustment mechanism for the interest rate policy for new first-time home loans was established in December 2022, allowing for city-specific policy implementation to reflect regional characteristics and stabilize policy expectations. Lower limits for mortgage interest rates for first- and second-home mortgages were also lowered in May 2022 and August 2023, respectively. Moreover, eligible existing first-home loan borrowers were given the opportunity to negotiate lower interest rates, resulting in a reduction in interest rates for existing mortgage loans of more than 22 trillion yuan. This has benefited over 50 million households and 150 million people and led to a substantial decrease in annual interest expenditure.
Maintaining the order of competition in the interest rate market is another key goal. Financial institutions are being urged to adhere to risk pricing principles and establish a clear relationship between loan interest rates and market interest rates. There is also an emphasis on standardizing deposit interest rate pricing practices to prevent unreasonable pricing that undermines market competition.
Looking ahead, the PBOC has outlined three priorities for further deepening the market-oriented reform of interest rates. Firstly, there is a need to improve the formation, regulation, and transmission mechanisms of market-oriented interest rates to optimize the allocation of financial resources. This involves enhancing the central bank’s interest rate control mechanism, cultivating market benchmark interest rates, and improving the interest rate transmission mechanism.
Secondly, there is a focus on promoting further marketization of deposit and loan interest rates to guide the continued decline of financing costs. The PBOC aims to consolidate the achievements of the LPR reform, enhance the market-based adjustment mechanism for deposit interest rates, and improve the interest rate self-discipline mechanism to support the real economy.
Lastly, there is an emphasis on improving the marketization of mortgage interest rates to better support the demand for housing. The PBOC will continue to implement differentiated housing credit policies, expand the space for independent pricing of mortgage interest rates, and reduce residents’ interest burden.
By persistently deepening the market-based reform of interest rates, China aims to strengthen the role of interest rates in the allocation of financial resources, lower financing costs, and enhance the effectiveness of monetary policy in supporting the development of the real economy.
Source: Central Bank website