China’s Rate Cut May Be Short on Impact

China’s move to slash lending rates to help slowing growth may lack punch, as Chinese banks likely will remain reluctant to lower loan rates for fears of hurting their profits.

The People’s Bank of China on Friday cut benchmark lending rates more than it cut deposit rates, while allowing banks more flexibility in raising rates paid to depositors. The step was designed to help Chinese banks attract savers and get the banks to lower funding costs for businesses, especially small and private entrepreneurs.

But banks may be reluctant to go along, say bankers and analysts. Because the cuts to the lending and deposit rates don’t match, the difference between how much they charge borrowers and how much they pay depositors would narrow sharply, pressuring profits.

“Banks may try to maintain their margins by increasing their lending premiums,” says analyst Zhong Zhengsheng at Guosen Securities Co., a Chinese state-owned brokerage firm, while adding: “The rate cuts would only have a very limited impact on lowering companies’ financing costs.”

A banking official at Bank of China Ltd., one of the country’s largest state-owned banks, said the rates on existing loans would be lowered as they are priced off the benchmark rate. But for new loans, the bank is likely to leave the rates “unchanged” as risks are ticking up in a weakening economy, the official said. Press officials at the bank didn’t respond to requests for comment.

Immediately after the PBOC’s announcement, some banks including Citic Bank Corp., Ping An Bank Co. and Bank of Ningbo Co. increased their deposit rates to the maximum allowed. Officials at the banks said they are hoping to get a leg-up in the competition for Chinese savers. At the same time, the officials add, they haven’t made any decision on lending rates. Press officials at Citic, Ping An and Bank of Ningbo didn’t respond to requests for comment.

The impact from what is called an asymmetric cut “will be pretty big,” a credit official at Citic Bank said. “We raised our deposits as fast as we can, but haven’t received any notice regarding the lending rate.”

Many business owners aren’t sure how much of a help they will get. Masa Tao, general manager at Shanghai Silk Textile Co., said the privately owned exporter wants to borrow funds to pay employees wages and bonuses ahead of the Lunar New Year holiday, and has applied to borrow 100,000 yuan ($16,393) from an online-financing company. “But the interest is too high,” Ms. Tao said. If banks were to lower their rates following the PBOC rate cuts, she added, “we’ll definitely consider borrowing from a bank.”

Banks in China have long been criticized for ignoring the needs of small businesses while favoring large state-owned enterprises because of their lower credit risks. “The issue here is whether banks will lower their criteria for us small businesses,” says Chen Tong, a restaurant owner in Quzhou, a city in eastern China’s Zhejiang province. “Well-established bigger companies may benefit more than we do because banks think those companies are more capable of paying back the money.”

Analysts at Barclays PLC estimate that the rate action would, on average, contract Chinese banks’ margins by between 0.13 and 0.19 percentage point next year and lower their net profits by 9% to 12%. Shares in Chinese banks fell on Monday, while the broader Shanghai stock market rose.

Friday’s policy-rate reduction is the strongest signal yet that China’s top leaders are growing increasingly uncomfortable with the slowdown in the world’s second-largest economy. Since early this year, Premier Li Keqiang has repeatedly urged Chinese regulators to help reduce the financial burden on businesses. But wary of the already-high leverage in China’s economy, the central bank until now had resisted pressure to cut rates or resort to other big-bang measures to stimulate the economy.

On Friday, the PBOC cut its benchmark one-year loan rate by 0.4 percentage point to 5.6%. It also cut its benchmark one-year deposit rate by 0.25 percentage point to 2.75% while allowing banks to raise deposit rates up to 3.3%. Unlike in the U.S. and other developed economies, banks in China don’t have the freedom to price deposits on their own.

According to the country’s top banking regulator, even though soured loans remain a small portion of banks’ overall portfolio, they surged 10% in the third quarter to 766.9 billion yuan ($125.7 billion), the most since 2005, as borrowers from property developers to steelmakers struggled to repay debt.

Meanwhile, some of the country’s largest banks–including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and Bank of China–all posted a drop in deposits last quarter, the first quarterly decline since the late 1990s. Part of the drop was due to Chinese savers shifting their funds to higher-rate offerings from private lenders and Internet finance companies. The fall in deposits has contributed to banks’ reluctance to lend as Chinese banks are banned from lending more than 75% of their total deposits.

Chinese banks are entering a “new norm,” said Jiang Jianqing, chairman of ICBC, China’s largest state-owned bank by assets, at a Beijing forum on Saturday, according to a transcript of his remarks. The days of some 30% increases in banks’ annual profits are gone, Mr. Jiang said, which calls for “deeper reforms.”

Source: MarketWatch