Reformist PBOC makes a pragmatic start to interest rate unification

The People's Bank of China, the Chinese central bank, started an interest rate reform on Aug 20, which we regard as a pragmatic start to unifying the "dual tracks" of interest rates - one for rates in the money market and the other for lending rates.

Under the reform, the PBOC has improved the formation mechanism of the loan prime rate (LPR) - the price of loans banks offer their best clients - and use the LPR as the reference rate for business and household loans. The earlier reference rate, the one-year benchmark lending rate, will be replaced in the future.

As the start in interest rate unification, the reform can help ease the financing woes faced by small and medium-sized enterprises, act as a prelude to more interest rate reforms, and give clues to China's macro policy-setting pattern.