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According to analysts at Standard Chartered, China is grappling with a ‘dual-track’ problem in its interest rate system and even though easing in monetary policy stance lowered market-based interest rates in 2018, the real economy’s borrowing costs remain elevated.

Key Quotes

“The weighted average lending rate climbing 39bps to 6.19% in the first three quarters of 2018. We think this has become an acute problem for China as its economy has slowed.”

“The People’s Bank of China (PBoC) is likely to tackle the dual-track problem via further rate reforms. Key measures may include (1) officially announcing a phase-out of benchmark lending and deposit rates this year, and adopting a policy rate system which includes the 7-day reverse repo rate and the one-year medium-term lending facility (MLF) rate within an interest rate corridor; (2) introducing a new methodology for calculating the loan prime rate (LPR) to ensure it is closely linked to policy rates, and encouraging banks to price new loans based on the LPR; and (3) narrowing the width of the interest rate corridor to c.100-200bps through improved liquidity management instruments.”

“In light of a moderating economy, we expect the PBoC to cut the one-year MLF rate by about 40bps this year to 2.9% from 3.3% currently, to help reverse the increase in the general loan rate in 2018. The MLF rate cut is justified by the downside growth risks and helped by subdued inflation and stable CNY expectations.”