Jul 22, 2013

    China rate reform may shield indebted firms

    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 out heavily indebted state firms and local governments.

    China's central bank announced last 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, at least in the short term, would likely bring relief to 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 reform move," said Mr Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management in New York, and a former professor at Beijing's Tsinghua University.

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

    Many economists said that, with China's growth slowing, the banks - including major lenders such as Industrial and Commercial Bank of China, China Construction Bank Corporation, 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 China's 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 said, the People's Bank of China's (PBOC's) move signals that Beijing wants to forge ahead with capital-market reform to remove the conditions that helped fuel China's property-led credit bubble.

    In the short term, though, international bankers and investors active in China said 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.