Understanding the Recent Interest Rate Substitution

On July 14, 2023, the State Council Information Office held a press conference on China's financial statistics for the first half of 2023. Zou Lan, Director of the Monetary Policy Department at the People's Bank of China, stated at the conference that, following the principles of marketization and rule of law, the PBOC supports and encourages commercial banks to independently negotiate with borrowers to amend contract terms or issue new loans to refinance existing ones.

From the bank's perspective, it naturally doesn't want to refinance your previous high-interest loan at a lower rate. But the problem is that its reluctance comes at the cost of assuming more risk.

If banks refuse, those previously burdened with higher interest rates will seek bridge loans to repay them, then mortgage their properties to obtain business loans, which carry lower interest rates. Business loans are typically issued on a one-year basis, meaning the risk originally spread over a 30-year loan becomes concentrated into just one year.

If the market value of the borrower's property drops sharply during that year, could they simply walk away from the house and stop repaying the business loan? The risk would then fall entirely on the bank.

So in this博弈, banks face a choice: either watch as大批 customers switch to business loans and dump risks onto them, or refinance those loans with lower-interest, 30-year fixed-rate mortgages.

Either way, there's a loss—either in interest income or through assumed risk.

The policy allowing negotiation is, at its core, telling banks they should choose reduced interest income rather than bear additional risk.