Why China’s Starting to Shake Up Interest Rates

The People’s Bank of China is liberalizing its interest-rate system in another milestone in landmark reforms started four decades ago to boost the role of markets in the economy. The overhaul might help lower the cost of borrowing for companies and households in the short term, as the U.S.-China trade war and domestic forces weigh on the economy.

Most central banks govern the price of money in an economy via the rate that banks are charged to borrow cash over short time periods. In China, that approach had been divided into two steps. First, the PBOC guided prices for funding in the interbank market via its reverse repurchase agreements and medium-term lending facility. Then, it set the benchmark rates that were used to price mortgages, business loans and other commercial lending -- the one-year and five-year lending rates. That was a relic of the command economy and the PBOC wanted to change it.