China’s Interest Rate Cuts Ignore Small Businesses

Chinese officials have made efforts in recent months to boost economic growth in the nation, in part by introducing two loan interest rate cuts in the last four months. Despite these cuts, reports say, small businesses in the nation aren’t seeing any ease of burden on their struggles to obtain working capital, as these cuts are mostly passed on to larger and state-owned companies.

According to The Wall Street Journal, the People’s Bank of China reduced the rate by which commercial banks price their loans twice since last November. Today, those rates are the lowest since 2010.

But these cuts are more often going to state-owned firms that, reports say, are taking out loans to refinance existing debt instead of make new investments. “The private small and midsize companies that create most of the new jobs in the world’s second-largest economy have largely been left out in the cold,” the report said.

An official manufacturing survey released Wednesday (April 1) showed improving atmospheres for larger, state-run enterprises, but a separate study by HSBC Holdings found that smaller manufacturers are experiencing a lull in their business operations.

Reports say small business lending is down in China because the government does not want to increase existing corporate debt. China’s preference for its state-run companies and government-owned banks has also led to these state-owned firms to gain the most benefit from new policies.

“The rate cuts since November haven’t been really effective,” UOB Kay Hian Holdings economist Chaoping Zhu told WSJ. “Liquidity remains tight and private businesses are being squeezed by SOEs (state-owned enterprises) that still have the privilege of accessing cheap capital.”

The issue is made even worse, reports noted, because Chinese banks realize that lower loan rates could eat away at their profits. Instead, they choose to target SOEs and secure them as long-term customers. Even with lower interest rates, these SOEs are backed by the government to ensure debt repayment, making them less risky than private sector small businesses. Plus, lenders are experiencing high costs thanks to a rising interbank rate charged among banks for short-term loans.

The issue highlights the shortcomings among government efforts to increase lending to China’s small businesses. The China Banking Regulatory Commission recently ordered big banks to target SMEs for loans to support the economy.