Chinese commercial banks have started pricing new bond issuances and corporate loans off the overnight interbank funding cost, replacing the one-year loan prime rate that has long served as the standard benchmark. As of mid-August 2026, overnight and 7-day interbank repo rates stood around 1.38%, compared with 3% for the one-year LPR, creating a significant gap that incentivized banks to adopt this new reference rate. The People’s Bank of China laid the groundwork for this transition on June 29, 2026, by launching regular overnight reverse repo operations at 1.25%, significantly below the 7-day reverse repo rate of 1.4%. For borrowers, this shift could lower financing costs but increases their sensitivity to daily liquidity conditions. By abandoning the LPR, financial institutions forfeit the buffer it provided against short-term volatility.
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