Hang Seng jumps into new LPR-based lending market

Now that China has a benchmark interest rate, called the Loan Prime Rate (LPR), Guangdong banks and companies are wasting no time using it.

The LPR is set to be launched today and then published on the 20th day of every month. It will be set based on quotations submitted by 18 commercial banks. The central bank has added eight medium and small banks, including two foreign-funded banks, to the existing list of 10 nationwide banks that are allowed to submit quotations to the previous national one-year LPR.

Although Hong Kong’s lending behemoth, HSBC, was left off the list, its subsidiary, Hang Seng Bank, has already jumped into the fray and launched a tranche of loans to companies in Guangdong based on the LPR. Over 30% of the RMB150 million the bank is handing out will go to private enterprises, encompassing trade financing and revolving credits, according to the bank.

“The private sector is highly active in Guangdong and SMEs’ financing needs are strong,” said Qu Weiquan, head of commercial bank at Hang Seng Bank (China). “Thanks to the openness of Guangdong’s finance market, the financing solutions targeted at these companies have always had more flexibility and the market is more acceptable to the new LPRs.”

According to the state media, under the new system, banks will submit their prices in terms of basis points added to the interest rates on funding they receive from the central bank in the open market to form an LPR, which represents a shift away from the current practice of referring to the more expensive one-year benchmark lending rate.

The move, aimed at lowering borrowing costs for the economy, is considered as a milestone in reforms started four decades ago to loosen state control of the economy.

The banks’ lending interest rates will be linked to the interest rates on the PBOC’s lending to the banks through open-market operations, giving the central bank a way to still affect the cost of borrowing.

The PBOC said the goal of the move is to make the national LPRs a more market-oriented mechanism so as to lower borrowing costs in the real economy.

Some analysts believe the new LPR regime could favor big state-owned borrowers while delivering few benefits to SMEs as looming growth headwinds and financial risks have been making banks more risk averse.

Still, few banks will be able to turn their nose up at the PBOC. Economists from Nomura were quoted by Caixin Global as saying banks may need to do some “national service” by lowering their average loan rates, but they may try to make up for their lower profits by increasing the price of riskier loans to the private sector and SMEs.

Economists at China Merchants Securities also think that if the implicit floor on lending rates is eliminated, the borrowing costs of big companies will probably decline substantially. But more policies will be needed to lower the borrowing costs of SMEs, which are relatively high risk and have little bargaining power.

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