BEIJING (Nov 24): 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 channelling 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’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 trillion yuan (US$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
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.

“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.”

Rate liberalisation
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 in Hong Kong, wrote in a note.

With China on track to record its weakest annual growth since 1990, economists at JPMorgan Chase, Barclays and UBS all said the PBOC will act again to shore-up demand.

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.”