MNI EXCLUSIVE: China Banks Slash Lending Rates To Small Firms

     BEIJING(MNI) - A drive by Chinese regulators for big banks to lend to the

private sector at a fraction of market rates risks pushing up non-performing

loans and even encouraging dangerous arbitrage if some borrowers use the cash to

invest in high-yielding funds, a government advisor and bank sources told MNI.

     "Small businesses play an important role for employment and economic

growth, but there is a contradiction between their naturally high credit risk

and the low lending rates they are currently enjoying," said Xu Hongcai, deputy

director of the Economic Policy Commission of the China Association of Policy

Science, a state think tank.

     "The repressed lending rate could push up the NPL ratio and hurt lenders'

profits," Xu said, stressing that the credit campaign was unsustainable and

should not be conducted on a large scale.

     A loan manager at a big commercial bank told MNI its average rate for small

businesses was just slightly higher than the benchmark, and much lower than in

the same period of last year. The PBOC benchmark one-year lending rate is 4.35%.

In comparison, non-bank institutions lend to small businesses at around 18%, Li

Junfeng, head of the financial inclusion department of the China Banking and

Insurance Regulatory Commission, said in response to a question from MNI at a

briefing last Friday.

     "The lending rate is at around 5% in most cases at present, but it can be

lower for qualified companies," the loan manager said, asking not to be named.

"We can barely cover our costs and this is squeezing profits, as we obey the

call to surrender a portion of our earnings to small businesses."

     --LENDING DRIVE

     Large state-owned lenders have been asked to increase lending to small

businesses by more than 30% and to cut interest rates on these loans by another

1 percentage point from last year, according to the latest executive meeting of

the State Council chaired by Primer Li Keqiang.

     In March, the China Banking and Insurance Regulatory Commission said growth

in banks' loans to small firms should keep pace with total loans and that

interest rates should be strictly controlled.

     Central government and regulators have been pushing banks to channel more

funding to the private sector since the second half of 2018, as a way of

countering economic headwinds.

     The top five state-owned banks' average lending rate was 4.76% in the first

quarter, down 0.13 percentage point from the fourth quarter last year, the

CBIRC's Li said.

     "If banks can control risks, keeping their bad loan ratio below 3%, their

interest rate should be set between 5-5.7% just for them to stay profitable and

commercially sustainable," Li said.

     --ARBITRAGE RISK

     Very low lending rates could prompt arbitrage, Li said, noting that the

regulator had taken note of the matter. Market sources told MNI that cash from

cheap loans could be directed to high-yielding financial offerings like trust

products. These had an average yield of 8.28% in March, compared with 7.63% in

the same period last year, according to PYSTANDARD, a financial data provider.

     "Banks usually strictly monitor the uses loans are put to, and particularly

loans to small businesses," the bank loan manager said, although he admitted

that arbitrage could occur.

     A manager at a city commercial bank told MNI the People's Bank of China had

cut the reserve requirement ratio of some small- and medium-sized banks which

had passed the quarterly macro prudential assessment in Q1, unlocking capital

for loans to small businesses. But small banks cannot afford to lower their

rates to the same extent as bigger institutions, he said.

     "When the lending rate is lower or slightly higher than the benchmark rate,

small banks are hardly able to make profits and have to shoulder big risks," he

said.

     The manager said he was more concerned about the drain on capital than a

possible rise in bad loans from the lending to small firms.

     "Big banks have many ways to recapitalise, including issuance of perpetual

bonds, but small banks would provide a challenge for the regulators," he said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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