(Yicai Global) Aug. 25 -- China's five major state-owned banks launched the conversion of Loan Prime Rate-based pricing for outstanding loans today, with only one week to go until the corresponding Aug. 31 deadline the People’s Bank of China set.

The central bank is also requiring lenders to use the LPR as the benchmark interest rate for all new floating-rate loan contracts that begin after Jan. 1. China's floating-rate loans mainly comprise those for mortgages and long-term corporate credit, and all existing loans must be repriced according to the new benchmark by the end of this month.

Outstanding loans can be switched from a fixed-interest rate to an LPR-based interest rate, but only one chance to make the change is available. For example, the previous interest rate benchmark for stock loans with maturities of more than five years was 4.9 percent, and LPR for loans with those with more than that was 4.65 percent this month, with monthly repricing.

Since the economy will continue to slow down in the medium and long term, some bankers say, it will be more advantageous for mortgage borrowers to choose an LPR-based interest rate, especially for ten-year loans.

The repricing of outstanding loans may affect more than half of the loan assets of the banking system. The total amount of outstanding mortgage loans in the banking system was CNY31 trillion (USD4.5 trillion) at the end of March, and the total amount of long-term corporate loans was CNY59 trillion, accounting for 19 percent and 37 percent of total loans, respectively, per a survey by Moody's Investor Services.

The profitability of banks will be squeezed to a certain extent as more loans are priced in LPR, but lenders can also improve their competitiveness and profitability through wealth management, asset management and pricing capabilities, Moody’s noted.

Editor: Ben Armour