China will replace its benchmark lending rates with market-based alternatives, said People’s Bank of China (PBoC) Governor Yi Gang in an interview, a key reform to the country’s financial sector, reported Caixin.

 

Yi’s words mark the first time that the PBoC has specified plans to unify the country’s two-track system of interest rates — one track being the benchmark rates set by the PBoC, while the other track being rates that are chiefly set by the market.

 

Although the benchmark rates are meant to act only as a reference and following them is no longer compulsory, they continue to loom large in the minds of bankers and borrowers, said Caixin. Replacing them with rates by the market will give commercial banks more room to price loans, with lower rates for lower-risk companies and vice versa.

 

China will push banks to begin using the national Loan Prime Rates (LPRs) — which are based on the interest rates that a handful of large commercial banks charge their most creditworthy borrowers — as a reference when pricing loans, Sun Guofeng, director of the PBoC’s Monetary Policy Department, said earlier this month at a press conference.