Central Bank Seen Fueling Old China as Banks Hold Key to Policy Success

China’s central bank said its surprise move to cut interest rates for the first time since 2012 is designed to help small firms and protect depositors instead of all-out monetary easing. How the nation’s lenders respond will determine if it works out that way.

 
The bulk of bank debt in China is still concentrated on big borrowers, with outstanding credit to small firms less than a third of total loans. The People’s Bank of China’s rate cuts came after months of targeted measures failed to lower financing costs for smaller companies.
Since its last move in July 2012, the PBOC has sought to keep growth ticking over while reducing debt expansion and increasing scrutiny of the shadow banking industry. The switch to broad-based stimulus risks a step back if lenders return to old habits of channeling loans to state-owned firms rather than more productive private enterprises.
“It may help local governments and state firms that borrow from banks, it may not help a great deal to firms that borrow from other parts of the financial system,” said Mark Williams, Capital Economics Ltd.’s chief Asia economist in London. “So the net result will be that big state-owned companies are somewhat better off.”
Outstanding bank loans to small businesses were 14.6 trillionyuan ($2.38 trillion) at the end of September, or 29.6 percent of total outstanding corporate bank loans, PBOC data showed. Private small businesses typically have limited access to raise money through bond or stock markets.

Asymmetric Cuts

China’s stocks and bonds rallied after the PBOC easing.
“We always felt that certain interventions would come forward to maintain a decent level of growth in China,” Andrew Mackenzie, chief executive officer of BHP Billiton Ltd., the world’s biggest miner, said today in an interview in Sydney.
The reductions to the deposit and lending rates aren’t a shift in policy direction, the PBOC said in a statement late on Nov. 21. The asymmetric cut of 40 basis points to the one-year lending rate to 5.6 percent and 25 basis points to the one-year saving rate to 2.75 percent, and an increased ceiling for deposit rates, is to protect households and consumers, it said.
“The ability of some enterprises, especially small businesses, to bear financing costs has weakened” amid the growth slowdown, the central bank said in a statement explaining the reasons behind its reductions.
Even after the cuts, that squeeze will only ease if banks are more willing to lend to smaller companies.

Bank Doubts

“There are lingering doubts for me as to whether banks will play ball by actually lowering rates in practice,” said Andrew Polk, Beijing-based economist with the Conference Board. “The length that the central bank went to in order to explain the logic behind the cut and other associated changes to the interest rate regime suggests that it did not want be seen as backsliding on reform in anyway.”
Along with the rate cut, banks were given the option of offering depositors as much as 120 percent of the benchmark rate, up from a previous ceiling of 110 percent. In a mixed response by lenders to the latest step in interest-rate liberalization, five of 16 listed banks have raised their rates to the ceiling by mid yesterday.
“This will likely further squeeze banks’ margins,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a note.
The main beneficiaries are business borrowers, Bloomberg North Asia economist Tom Orlik wrote in a note. State-owned enterprises, real estate developers and local government investment platforms will be able to tap new loans at lower rates to refinance existing borrowing and fund new projects, he wrote.

Iron, Steel

Among listed companies, industries like shipping and iron and steel -— with total debt-to-EBITDA of 27 percent and 17 percent, respectively —- have most to gain. Technology and consumer services sectors, which have debt-to-EBITDA levels of 2 percent and 3 percent, respectively, have less at stake, according to Orlik.
With China on track to record its weakest annual growth since 1990, economists at JPMorgan Chase & Co., Barclays Plc and UBS AG all said the PBOC will act again to shore-up demand.
China should adopt a “moderately loose” fiscal policy next year, cut interest rates again and lower the reserve ratio at an “appropriate” time, Securities Times reported Ma Xiaohe, deputy head of the Academy of Macroeconomic Research of the National Development and Reform Commission, as saying.
The timing of any further easing in large part will come down to what banks do on the lending side.
“Authorities are trying to pursue both growth-supporting policy and financial reform at the same time,” said the Conference Board’s Polk. “Whether banks will actually pass any cost savings on to borrowers remains to be seen — especially for smaller private borrowers who often borrow from non-bank financial entities anyway.”