Six Questions on the Consolidation of Interest Rates

"Consolidation of interest rates" is one of the hottest topics in the recent macroeconomic field. From the signals released many times during the year, the merger of interest rates will gradually enter a substantial landing stage. The preliminary idea may be that the lending interest rate is prior to the deposit interest rate. First, we should consider not publishing the benchmark lending interest rate, improve the quotation rate mechanism of the loan market of commercial banks, and use the basic lending interest rate (LPR), that is, the large financial institutions. The interest rate of the loan executed on its best customers is used as a new benchmark for loan pricing.

Interface News in the interview process found that the views of all parties on how to change the "anchor" of the benchmark interest rate, how to improve the LPR pricing mechanism, and whether China still needs to cut interest rates are inconsistent. Overall, analysts believe that a series of preparatory work should be done before the loan interest rate is formally changed into an anchor, such as defining the leading policy interest rate, policy target interest rate, and cultivating the loan pricing ability of commercial banks. It remains to be further discussed which market interest rate LPR will be linked to in the future. Moreover, whether the deposit and loan interest rates are combined, there seems to be some risk. In addition, analysts point out that the completion of interest rate consolidation does not mean that SME lending rates can be directly reduced. In the second half of the year, we should further dredge the transmission mechanism of monetary policy, deepen the reform of fiscal and taxation system, do "hard" soft budget constraints of state-owned enterprises and local governments, and solve the imbalance of resource allocation, so as to reduce the financing cost of small and medium-sized enterprises. 

In 1996, China formally launched the interest rate marketization reform with the breakthrough of liberalizing the interbank lending market interest rate. In 2004, the floating range of RMB loan interest rate was relaxed to allow RMB deposit interest rate to rise; in 2012, the upper limit of floating range of deposit interest rate was adjusted to 1.1 times of the benchmark interest rate, and the lower limit of floating range of loan interest rate was adjusted to 0.7 times of the benchmark interest rate; in 2013, the control of loan interest rate of financial institutions was fully liberalized; in 2015, deposits were liberalized. The upper limit of interest rate fluctuation. So far, the marketization of interest rate in China has basically been completed. However, as the Central Bank continues to publish the deposit and loan benchmark interest rate, the deposit and loan benchmark interest rate coexists with the market-oriented risk-free interest rate, forming a situation of "two tracks of interest rate", which affects the effective transmission of monetary policy. For example, since the fourth quarter of last year, the central bank has taken a number of measures to increase market liquidity, guide financial institutions to finance private and small and micro enterprises, and reduce financing costs. These measures include reducing the deposit reserve ratio of financial institutions, directed medium-term lending facilities (TMLF), and providing liquidity support for commercial banks to issue renewable debt supplementary capital.

From the point of view of money market interest rate, the aim of "broad money" has basically been achieved. In the first half of this year, the 7-day pledge repurchase rate (DR007) of deposit institutions in the inter-bank market was about 2.62%, down more than 0.3 percentage points compared with the same period last year, and down 0.14 percentage points compared with the second half of last year. Since June 11, the Shanghai Interbank Offer Rate (Shibor) has been trading at less than 2% overnight for 23 consecutive trading days, even falling below 1% during the period, constantly setting a 10-year record. However, the real lending rate is another picture. According to the monetary policy implementation report of the first quarter of 2019 issued by the People's Bank of China, as of March this year, the weighted average interest rate on loans was 5.69%, up 0.05 percentage points from December last year. Among them, the weighted average interest rate on general loans was 6.04%, up 0.13 percentage points from December last year, up 0.03 percentage points from the same period last year. The People's Bank of China pointed out in its report that the liquidity of the banking system is reasonable and abundant, the interest rate of money market is stable, and the real interest rate of loans is greatly affected by risk premium. To deepen the reform of interest rate marketization, the current focus is to promote the "two-track integration" of loan interest rate, which is conducive to enhancing market competition, promoting financial institutions to more accurately price risks, reducing risk premiums, and further dredging the transmission of money market interest rate to loan interest rate, and promoting the reduction of financing costs of small and micro enterprises.

On May 18, the Governor of the People's Bank of China, Yi Gang, pointed out at the 15th meeting of the Expert Steering Committee on China's Debt Index that the benchmark deposit interest rate of the Central Bank will continue to play an important role in promoting the reform of interest rate liberalization. In fact, the lending interest rate has been liberalized, but we can still further explore the reform ideas, such as no longer publishing the benchmark lending interest rate, while continuing to study the trend of lending interest rate and the switching of stock loan contracts.

On June 26, the executive meeting of the State Council mentioned that the next step is to deepen the reform of interest rate marketization, improve the quotation rate mechanism of commercial banks'loan market, and better play the guiding role of quotation rate of loan market in the formation of real interest rate. On July 12, Sun Guofeng, Director-General of the Monetary Policy Department of the People's Bank of China, made it clear once again when interpreting the financial data of the first half of the year. It is conducive to dredging monetary policy that banks should make more use of market-quoted interest rates as a reference for loan quotations.

In mature markets, there is basically no benchmark lending interest rate, and the level of lending interest rate is completely determined by the market. However, in our country, the benchmark interest rate of loan published by the central bank has always been the reference benchmark for financial institutions to calculate the interest rate of loan, as well as the pricing benchmark for external quotation and contract signing. Analysts point out that from Yi Gang's comments and recent management's comments on interest rate marketization, Loan Prime Rate is likely to replace the benchmark lending rate as a loan in the future.