Rate reform may serve interests of state companies

Liberalisation of mainland bank lending rates raises suspicion it is to help indebted state firms

PUBLISHED : Monday, 22 July, 2013, 12:00am
UPDATED : Monday, 22 July, 2013, 5:40am

China's decision last week to liberalise bank lending rates, though widely applauded, has raised suspicions that it reflects official concerns over possible loan defaults and is aimed at helping heavily-indebted state firms and local governments.

The central bank announced on Friday that banks could now lend at whatever rate they liked, enabling them to compete for new borrowers with cheaper credit at a time when the world's second-largest economy is slowing markedly.

But some investors said the move was symbolic and likely represented, in the short term at least, relief for heavily indebted state-owned enterprises (SOEs), big private-sector employers and local government financing arms.

"I'm a little sceptical of the appraisals that this is a big, big reform move," said Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management in New York and formerly a professor at Beijing's Tsinghua University.

"My concern in the short run is that what will happen is that a bunch of local government financing vehicles will get lower interest rates," he added.

The announcement by the People's Bank of China (PBOC) was welcomed by economists and came as Group of 20 leading economy finance ministers and central bankers met in Moscow, where Japanese Finance Minister Taro Aso described it as a step in the right direction.

"We see [the] announcement as a signal of the PBOC and the new leaders' commitment towards interest rate liberalisation and more market-oriented reform," wrote Jian Chang and Joey Chew, economists at Barclays, in a note to clients.

However, they and other economists said that, with the mainland's growth slowing, the banks - including major lenders such as Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China - were unlikely to take advantage of the opportunity.

As it is, only about 11 per cent of loans extended by the biggest banks are below the just-scrapped 6 per cent official rate, despite having had some leeway to stray from it. Most are in fact priced well above that.

Instead, economists say, the PBOC's move signals Beijing's determination to forge ahead with capital markets reform to remove conditions that helped fuel the property-led credit bubble.

In the short term, though, international bankers and investors active in China say the timing of the reform - coming roughly a month after the PBOC cracked down on lending in the shadow banking sector - may be less about banks issuing new loans than about keeping old loans from going into default.