"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 ($2.38 trillion) at the end of September, or 29.6 per cent of total outstanding corporate bank loans, PBOC data showed. Private small businesses typically have limited access to raise money through bond or stock markets.
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, the world's biggest miner, said on Monday in an interview in Sydney.
Protect households
The reductions to the deposit and lending rates aren't a shift in policy direction, the PBOC said in a statement late on November 21. The asymmetric cut of 40 basis points to the one-year lending rate to 5.6 per cent and 25 basis points to the one-year saving rate to 2.75 per cent, 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."
Depositors' rates
Along with the rate cut, banks were given the option of offering depositors as much as 120 per cent of the benchmark rate, up from a previous ceiling of 110 per cent. In a mixed response by lenders to the latest step in interest-rate liberalisation, 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.
Industries to gain
Among listed companies, industries like shipping and iron and steel - with total debt-to-EBITDA of 27 per cent and 17 per cent, respectively - have most to gain. Technology and consumer services sectors, which have debt-to-EBITDA levels of 2 per cent and 3 per cent, respectively, have less at stake, according to Orlik.
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.
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."
- Bloomberg
