New loan benchmark to be based off medium-term liquidity - China's central bank

A new benchmark interest rate Chinese banks will need to use to set lending rates will be linked to the central bank's medium-term liquidity facility, a People's Bank of China policy adviser told state media.

China's central bank unveiled a key interest rate reform on Saturday to help steer borrowing costs lower for companies and support a slowing economy that has been hurt by a trade war with the United States.

"Through the reform, it is clearly required that the banks' lending rates should be linked to the LPR (loan prime rate), and the LPR should be linked to the MLF (medium-term lending facility) interest rate, thus establishing a relatively smooth transmission mechanism. In the future, if the policy interest rate falls, the loan interest rate will also fall, which will help to reduce the financing cost of enterprises," Ma Jun said.

Under the PBOC's changes, banks must set rates on new loans using the new LPR as the benchmark for floating lending rates rather than the PBOC's benchmark bank lending rate.

Analysts believe the central bank could cut the one-year interest rate on the MLF, which stands at 3.3%, in order to guide borrowing costs lower.

Analysts say the new LPR rate will be lower than the current level, but they are divided over the scope of reductions on borrowing costs for firms.