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Iris Pang, economist at ING, notes that China has announced that the Loan Prime Rate (LPR) has to be to quoted to customers and the formation of LPR will be priced on a +/- basis point basis  from open market operation interest rates.

Key Quotes

“Initially, the open market operation interest rate chosen is the Medium Term Lending rate (MLF). The MLF is currently quoted in 1Y mostly but will add a 5Y quote, so that the LPR curve is more applicable to bank loans.”

“Frankly speaking, we do not think the MLF is a 100% market-based interest rate, but of course more market-based than  the 1Y benchmark interest rate, which is a fixed rate announced in the past by the central bank.”

“Still, we expect further liberalisation of the LPR to be quoted based on SHIBOR for short term loans and based on the  China sovereign yield for long term loans.”