BEIJING- China’s central bank is likely to cut lending rates further in a bid to revive the economy but reluctance among private firms and households to borrow means continued policy easing could end up hurting banks already battling margin pressures, analysts said.
Small cuts in rates will not have a big impact on demand for loans as families and businesses repair balance sheets damaged by COVID and repay debts, economists said, forcing Beijing to rely on fiscal stimulus and other policy tools to spur demand.
The People’s Bank of China (PBOC) cut its benchmark loan prime rates (LPR) for the first time in 10 months on Tuesday, with a smaller-than-expected 10-basis point reduction in the five-year LPR, which influences the pricing of mortgages.
Most economists expect another modest 10 bps LPR cut in the second half – on top of a 25 bps cut in banks’ requirement ratio (RRR). The PROC last cut the RRR – the amount of cash that banks must hold as reserves — in March, by 25 bps.
To help create room for lending rate cuts, Beijing will have to let banks lower rates on deposits, a key source of funding for the lenders, with their net interest margins – a key gauge of profitability – at record lows.
Chinese banks’ NIM shrank sharply from 1.91 percent at the end of last year to 1.74 percent last quarter.
“It is possible to see further LPR cuts in the second half of this year … That will again bring cost pressure on banks,” said Wang Yifeng, a banking sector analyst at Everbright Securities Co.
“I think banks are likely to take measures in the fourth quarter to control the costs of liabilities, such as further lower interest rates of some deposit products,” Wang said. “Pressure on banks from narrowing NIM still persists.”
Each 5 basis points LPR cut could reduce pre-tax profits of major banks by as much as 1.8 percent, China Merchants Securities said in a report.
But lowering of both lending and deposit rates will not help banks if demand for credit doesn’t pick up.
A round of deposit rate cuts by banks since September have so far failed to spur consumption, and further cuts may be counterproductive as savers are hurt by weaker returns, analysts said.
New household loans, mainly mortgages and consumer loans, accounted for just 14 percent of total new loans in the first five months, down from 18 percent last year and 40 percent in 2021, while the bulk of new loans went to companies, central bank data showed.
“A small rate cut is a useful painkiller for symptoms but cannot alleviate the real problem,” said Gary Ng, Asia Pacific senior economist of Natixis.
