Thread by @ChinaFinance40

China recently cut the upper limit on private lending interest rates protected by law,capping it at four times China’s one-year LPR.The efforts to lower maximum legal private lending interest rates need to respect market rules,said @YipingHuangPKU1: new.cf40.org.cn/uploads/202009… 1/5

Lowering the judicially protected ceiling would help drive down the interest rate in private lending and is in line with the policy goal of reducing costs of social financing. However, the ceiling should not be lowered by too much or too fast. 2/5

Efforts to adjust the cap on the interest rates need to strike a balance between lowering financing costs for SMEs and energizing private lending. At the end of the day, a basic condition for the financial system to work soundly is market-based risk pricing. 3/5

The legally protected interest rate cannot be slashed by too much because that would dissuade lenders from the private lending market, further widen the gap between demand for and supply of funds, and fail to meet the financing needs of #SMEs. 4/5

It’s equally important to keep in mind that the legally protected interest rate is the ceiling, not the benchmark lending rate, and there are various ways to lower private lending rates i.e. easy monetary policy, improving financial inclusion etc. 5/5