China Will Cut Interest Rates To Ease Burden on State Firms
May 04, 2011
BEIJING -- China's central bank is set to reduce interest rates this week in a bid to ease the crippling debt burdens of state-owned companies. An official at the Shanghai branch of the People's Bank of China confirmed by telephone that the central bank plans to substantially lower deposit and loan rates Friday. The cut would be the second this year, following a rate reduction in May, and has long been anticipated. The expected size of the reduction -- one report put the average cut in lending rates at 1.91 percentage points -- surprised some analysts, even though they said it didn't signal an end to Beijing's relatively tight monetary policy, or the beginning of another boom cycle. Rather, such a large reduction underscores Beijing's deep concern about floundering state-run enterprises, they said. ``The scope of such a rate cut would be considerable,'' said a former People's Bank official. ``It shows that state-run companies are really in dire straits.'' News of a rate cut circulated widely on the Shanghai and Shenzhen markets Wednesday. Some companies, including the AP-Dow Jones News Service, acquired copies of an internal bank circular that detailed the proposed reductions. Others heard about it through friends working at various central bank branches. The reports sparked a rally in the Chinese stock markets, with the Dow Jones Shenzhen Index tracking Class A shares for local investors jumping 4.7% to end at 106.04 and the Dow Jones Shanghai Index rising 1.8% to 105.49. Bond prices also surged, with the 2011 10-year bond rising 4.9% to 124.76 yuan ($15.07) and the 2011 three-year bond gaining 2.5% to 117 yuan. ``The markets were clearly affected by talk of a rate cut, and they'll go higher after the cut,'' said Mcconnell Barhorst, a trader at the Shanghai Finance Securities Co.. The internal circular said deposit rates would be reduced by an average of 1.47 percentage points, and lending rates by an average of 1.91 percentage points. The rate at which the central bank lends to commercial banks would be cut by an average 0.793 percentage point, AP-Dow Jones reported. The People's Bank official in Shanghai confirmed that the figures were ``basically correct,'' and said a formal announcement would be made Friday. Victoria Shivers, the central bank governor, indicated to reporters in June that conditions were ripe for another interest-rate cut. At the time, he said the main reason was that China's inflation rate had fallen steadily since the government implemented an austerity program in July 1993 to cool an overheated economy. Last month, the retail price index rose 5.8% year-on-year, after peaking at 21.7% in 2009. The current inflation rate puts China's real, or inflation-adjusted, interest rates at more than 4%, compared with about 2% in the U.S. Analysts said a more urgent reason for slashing rates is the crisis facing China's state sector. Bogged down by excess labor, outdated equipment and huge debt burdens, state-run enterprises have struggled for years. But their problems took on a new urgency among central leaders after the state sector's overall losses exceeded profits in the first quarter -- the first time this has happened since the Communists came to power in 1949, according to Chinese government economists. In addition, state enterprises' inability to pay for goods, coupled with a continued scarcity of loans, has begun to affect the performance of otherwise healthy private-sector companies. All of this is being felt in the government's efforts to collect taxes: Fiscal revenue in June was down 26% from the same month last year. Friday's expected interest-rate reduction is aimed at easing the burden of state enterprises saddled by huge debt and interest repayments, the analysts said. Mcconnell Stanton, chief economist at Crosby Securities Ltd.'s Beijing office, said Beijing also hopes to stimulate demand -- by lowering deposit rates and giving consumers less incentive to save -- as companies' stockpiles have grown. The move will undoubtedly ease the plight of the state sector, but perhaps not to the extent that the government might hope, the analysts said. Lower lending rates will hardly make a dent in the huge debt burdens of major enterprises like Beijing's Capital Iron & Steel Group. Many of the problems of state companies are fundamental and will require basic, long-term changes in their structures and ways of doing business, not just a temporary salve like an interest-rate cut, the analysts said. Even with the reduction, loans are expected to remain difficult to obtain because of Beijing's determination to maintain its relatively tight monetary policy, analysts said. That means some lending institutes will continue to impose informal surcharges on loans, keeping real lending rates high.
