'Political' rate cut does little for struggling financial institutions

China's interest-rate cut last week will boost the economy in a politically sensitive year but do little to help banks as they struggle with problem loans, according to analysts.

The central bank chose to ease the financial burden of domestic borrowers at the expense of the banks by making deeper cuts in lending rates than deposit rates.

It remains to be seen how the banks will pass on the changes to their customers.

Analysts said that spurring economic growth, boosting corporate profits and holding the line on unemployment were the key concerns ahead of this year's Communist Party Congress, where top political jobs come up for grabs.

'This is a year for political stability,' an economist in Beijing said.

'Banks were seen as less important.'

The central bank cut commercial bank lending rates by 50 basis points but gave the banks only a 25 basis-point reduction in deposit levels. That left the interest on a one-year loan at 5.31 per cent and interest on a one-year deposit at 1.98 per cent.

Analysts said bank stocks were expected to see heavy selling pressure when stock markets resumed today after the two-week break for the Lunar New Year.

The People's Bank of China, the central bank, believes commercial banks are able to handle the narrower spread and will benefit ultimately from being forced to become more competitive.

In a statement on its Web site, it said the spread was now an average of about 3.6 percentage points, compared with the 2 to 3 percentage points in the United States, Japan and European Union countries.

'The further reduction of the spread between deposit and lending rates will have a certain impact on financial institutions in the short term,' the central bank said.

'But in the long run it will help promote the further adjustment and improvement of the debt-asset structure of financial institutions and spur new types of business.'

The central bank described its move, which took effect on Thursday, as an effort to stimulate consumption and growth in the face of a global economic slowdown. The mainland economy posted a strong 7.3 per cent growth rate last year but the expansion slowed in the second half.

The central bank said it was taking into consideration the debt burden of domestic corporate borrowers.

State media said the move would save domestic companies some 30 billion yuan (about HK$28.34 billion).

Bankers were cautious in their assessment of the move, conceding they would have to work harder this year to boost profits.

'The spreads will narrow,' Bank of Communications economist Gao Ping said. 'But the central bank was looking at this from a macroeconomic viewpoint.'

Chen Miaoqing of the Huaxia Bank said: 'There will be an impact on us. We are still studying this to see how big an impact it will be.'

The Huaxia Bank was one of the better performers last year, posting a 39 per cent rise in profit.

Most of the mainland's state banks still have substantial problems with non-performing loans, however, and this will not make their burden any lighter.

While the Bank of China reported higher profits for last year, China Construction Bank reported profits fell to 5.19 billion yuan from 7.54 billion yuan a year earlier, and that it made substantial provisions for problem loans.

The Bank of Communications said it had higher operating profit but provisions led to lower net profits.

On the other hand, analysts said the shrinking interest margin could be offset by more businesses and fewer bad loans.

Wang Lingyi, economist with the Shanghai Academy for Social Sciences, said state banks would see an increase in private-sector led lendings, which could more than make up for the squeezed margins.

Others said lower lending rates would also improve corporates' ability to service their debt, which in turn would improve state banks' non-performing loans levels.