Under the system, nine commercial banks will submit the lending rate they charge their best quality clients each day to set the prime rate, the central bank said in a statement.
Since July, the People’s Bank of China has technically allowed banks to set their own lending rates, though deposit rates remain fixed by government order.
But the central bank still publishes a “policy” lending rate, which it said will be phased out after a “certain period of time” to be replaced by the new prime rate.
The move is seen as part of the government’s reforms to liberalise the setting of interest rates as China seeks to restructure its economy for sustainable, although slower, growth.
The regime will “help the smooth transformation of the (loan) pricing benchmark from being set by the central bank to being decided by the market”, the central bank said.
“It will help lay the institutional foundation for further facilitating the market reform of interest rates,” it said.
A weighted average will be calculated based on the submissions by banks and announced daily by China’s interbank market, the central bank said, adding that initially only the one-year rate will be published.
It was set at 5.71 percent on Friday, according to the official website for interbank rates.
In a research note, ANZ Banking Group said the move was “a step towards further interest rate liberalisation”.
“The (rate) could replace the current policy lending rate and will be used as a new benchmark for lending rates gradually,” it said.