Naysayers Already Argue China Interest Rate Reform Will Fail

Caixin: Lending Rate Reform Could Benefit Big Borrowers Most, Analysts Say

Analysts hold different views on whether the new reforms will lead to loan rates actually being lowered. Economists at Nomura said “the new LPR regime and the PBOC quasi-policy rate cuts could favor big state-owned borrowers while delivering few benefits to small and medium-sized enterprises (SMEs),” as looming growth headwinds and financial risks have been making banks more risk averse.

Banks may need to do some “national service” by lowering their average loan rates, but they may try to make up for their lower profits by increasing the price of riskier loans to the private sector and SMEs, the Nomura economists said.

Economists at China Merchants Securities also think that if the implicit floor on lending rates is eliminated, the borrowing costs of big companies will probably decline substantially. But more policies will be needed to lower the borrowing costs of SMEs, which are relatively high risk and have little bargaining power.

Every effort to lower borrowing costs for SMEs has failed. I doubt SMEs will see much of a boost beyond some initial window-dressing by banks. The more important issue for the next couple of months is whether lending picks up at all and where the credit flows. The government also has tight restrictions on the property sector and those have also failed at every turn. Moreover, if credit doesn't pick up and real estate restrictions succeed this time, the result will be one of the last pillar's of GDP growth being starved of credit.