Rate cut won't solve manufacturers' woes

The central bank's interest rate cut on Friday, the first since July 2012, will ease the debt burden of industries struggling with overcapacity but not by enough to prompt a surge in production, experts said.

With sluggish global commodity prices and weak domestic demand, manufacturers do not have much initiative to expand output in the short run, they said.

The interest costs of the top 86 iron and steel producers, which owe more than 1.3 trillion yuan ($211.6 billion) to commercial banks, may decrease by 5 billion yuan as a result of the People's Bank of China's move to cut the benchmark lending rate by 40 basis points to 5.6 percent, data from the China Iron and Steel Association show.

As of Aug 31,18 of the 33 listed steel companies had an asset-liability ratio above 70 percent, according to Wind Information Co Ltd.

The PBOC's move was a more direct and effective way to cut corporate borrowing costs than its previous measures such as "targeted easing" to increase interbank liquidity and lower money market rates and bond yields.

Liu Xinwei, an analyst at commodity data provider Sublime China Information Group Co Ltd, said that even after the rate cut, industries with excess capacity such as glass, cement, iron and steel will still find it hard to borrow.

"Companies in those industries may be starved of liquidity in the long term," he said.

Wang Tao, chief economist in China at UBS AG, said that lower interest rates will have only a limited impact on corporate credit demand, even though it can ease corporate financial conditions.

"Credit supply has been controlled more by quantitative and prudential tools, which are only being relaxed at the margin," she said. "We continue to expect credit growth to slow in the coming year."

Recent economic indicators taken together suggest worsening deflation in the industrial sector.

The flash manufacturing Purchasing Managers Index compiled by HSBC Holdings Plc edged down to 50 in November from 50.4 in October, the lowest level since June.

The Producer Price Index fell by 2.2 percent in October, the 32nd consecutive decline, the National Bureau of Statistics said. Excess capacity, plus significant financial risks in the official and shadow banking sectors, may add downside pressure on the economy, and the government should urgently pursue market reforms, economists said.