The People's Bank of China, the central bank, said on Aug 25 that it would continue to use interest rate reforms to further lower the borrowing costs for companies and clarified that despite pressures on the banking sector it would not lower the capital adequacy ratio requirements for lenders.

Liu Guoqiang, vice-governor of the PBOC, said during a news briefing that between August and December, efforts will be made to reduce financing costs for market entities by about 600 billion yuan ($86.73 billion), mainly through lower lending rates and a better interest rate transmission mechanism. The target for the full year is to reduce 1.5 trillion yuan in costs for enterprises, he said.

Central bank officials said that the loan prime rate reform, which started in August 2019, has eliminated the banks' invisible floor of lending rates, which in this case is 90 percent of the one-year bench mark lending rate. The LPR has also helped in the liberalization of deposit rates, as banks have adjusted the lower deposit rates to match the falling lending rates, they said.

Monetary authorities also exuded confidence that the adjustment of the interest rate benchmark for the outstanding floating rate loans will be completed by the end of this month.

The future LPR reform will depend on macroeconomic growth, inflation and the demand-supply relationship in the lending market. It will also be influenced by the expectations of 18 banks, which report the rate on the 20th of every month.

Sun Guofeng, head of the PBOC's monetary policy department, said that the LPR reforms will continue to bring down the lending rate for enterprises.

In July, the weighted average lending rate for corporates was 4.68 percent, down by 0.64 percentage point from a year earlier. The drop was sharper than the 0.4 percentage point decline of the LPR in the same period, according to central bank data.

The one-year LPR has remained unchanged for four consecutive months, at 3.85 percent. The over-five-year LPR, on which many lenders base their mortgage rates, has also stayed unchanged at 4.65 percent, according to the PBOC. The LPR is mainly referred to as the rate of the medium-term lending facility, or MLF, the central bank's medium-term policy rate.

The COVID-19 epidemic has posed several challenges to China's financial sector, but the overall risks are still under control, as the banking and insurance institutions have taken some prospective measures to offset the negative impact, said the PBOC officials.

Banking and insurance institutions have resorted to special stress tests and prepared contingency plans to deal with unexpected scenarios, said Xiao Yuanqin, chief risk officer and spokesman of the China Banking and Insurance Regulatory Commission.

Liu urged banks to make use of instruments like local government special bonds, perpetual bonds and second-tier capital debt for supporting the real economy and small and medium-sized enterprises. "Banks should adopt various measures to augment capital, and strengthen the ability to serve the real economy and support small and micro enterprises."

During the second half of this year, financial regulators plan to dispose more than 3 trillion yuan of nonperforming loans, nearly three times the disposed NPL amount in the first six months.

Financial institutions would be urged to raise NPL provisions, based on the expected credit losses, to prevent risks at an early stage, said Xiao. The current capital adequacy ratio of Chinese banks is at 14.21 percent, which is still higher than the regulatory standard of 10.5 percent.