China trims lending rates with more ‘stealth’ cuts on the way

A Chinese investor monitors stock prices at a brokerage in Beijing. China has kicked off its interest rate reform program in an effort to lower corporate borrowing costs. (AP)
Updated 21 August 2019
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China trims lending rates with more ‘stealth’ cuts on the way

  • Beijing tipped to further lower borrowing costs as economy struggles with weakening domestic demand

SHANGHAI: China lowered its new lending reference rate slightly on Tuesday, as the country’s central bank kicked off new interest rate reforms designed to lower corporate borrowing costs. But the tiny reduction in the revamped Loan Prime Rate (LPR), which is calculated from price contributions from selected banks, reflects lenders’ reluctance to reduce loan rates. That has fueled expectation Beijing will need to take more steps to guide borrowing costs lower in a struggling economy.
The modest reduction in the lending rate comes after the People’s Bank of China (PBOC) on Saturday designated the LPR the new lending benchmark for new bank loans to households and businesses, replacing the central bank’s existing benchmark one-year lending rate.
The new one-year LPR was set at 4.25 percent on Tuesday, down six basis points from 4.31 percent previously. It was 10 basis points lower than the PBOC’s existing benchmark one-year lending rate.
“While this should nudge banks to reduce lending rates slightly, the impact on economic activity will be marginal,” Capital Economics Senior China Economist Julian Evans-Pritchard said in a note. “A decline of only a few basis points is small.”
He also said the PBOC would need to take other steps, including cuts to medium-term liquidity rates, if it wants to continue reducing the LPR to lower funding costs for banks.
The new five-year LPR rate was set at 4.85 percent, according to the PBOC’s national interbank funding center, which was below the five-year benchmark lending rate of 4.9 percent.
Under the reforms, the LPR will broadly track changes in the PBOC’s medium-term lending facility (MLF) rates, making banks’ lending rates more market-based. MLF rates are generally seen as the rates banks pay for their funding and are determined through the central bank’s open market operations bidding process.

HIGHLIGHTS

• China kicks off interest rate reforms.

• LPR set slightly lower, as expected.

• Analysts expect PBOC to cut MLF rates.

Analysts say the reforms are an official attempt to lower financing costs in the world’s second-largest economy, which has faced continued pressure from weakening demand at home and an extended trade war with the US. The new mechanism would force banks to price their loans closer to market rates.
Despite economic growth nearing 30-year lows, analysts say the PBOC has been reluctant to cut interest rates system-wide due to fears of a further surge in debt and possible property bubbles. It last cut the one-year lending rate in 2015. Indeed, existing loans including mortgages are still exempt from the new benchmark scheme.
“To all intents and purposes it is a ‘stealth’ easing policy,” brokerage Jefferies wrote in a note. Some market participants expect the central bank will cut the interest rate on one-year MLF, which could essentially bring the LPR down further.


Lebanon’s Jammal Trust Bank forced to close by US sanctions

Updated 19 min 51 sec ago

Lebanon’s Jammal Trust Bank forced to close by US sanctions

  • Jammal Trust Bank is accused of helping to fund the Hezbollah movement in Lebanon
  • The bank has 25 branches in Lebanon and representative offices in Nigeria, the Ivory Coast and Britain

BEIRUT: Lebanon’s Jammal Trust Bank has been forced to wind itself down after being hit last month by US sanctions for allegedly helping to fund the Iran-backed Hezbollah movement, the bank said on Thursday.
The central bank said the value of the bank’s assets, and its share of the national deposit guarantee body, were “in principle enough to pay all deposits and commitments.”
Jammal Trust Bank denied the US allegations in August after the bank and its subsidiaries were hit with sanctions, accused of helping to fund the Hezbollah movement in Lebanon.
“Despite its sound financial situation ... and its full compliance with banking regulations, the (bank) was forced to take the decision to liquidate itself in full coordination with the central bank,” Jammal Trust said in a statement.
The bank has 25 branches in Lebanon and representative offices in Nigeria, the Ivory Coast and Britain, its website says.
It is a relatively small lender, with net assets of 1,600 billion Lebanese pounds ($1 billion) at the end of 2017, according to the annual report on the latest year for which data is available.
Washington has sought to choke off Hezbollah’s funding worldwide, with sanctions among a slew of steps against Tehran since US President Donald Trump withdrew last year from a 2015 international nuclear deal with Iran.