Credit bias curbs rate cut benefits

On November 21, the People's Bank of China (PBOC), the country's central bank, announced that it was cutting 40 basis points off the one-year benchmark lending rate.

Theoretically, such a move will greatly reduce financing costs for business. However, the unwritten rules of Chinese bank lending mean the PBOC's rate cut will do little to ease the financing burdens on China's many cash-strapped small- and medium-sized enterprises (SMEs). According to reports, while the one-year lending rate was 6 percent before the recent cut, in actuality many private enterprises were paying interest rates above 20 percent. The PBC's latest adjustment will do little to alter this situation.

Yet, liquidity is not in short supply these days. As of June, broad money (M2) exceeded 120 trillion yuan ($19.5 trillion). The coexistence of ample liquidity with high financing costs stems from the reluctance of many banks to lend to SMEs, which are traditionally seen as far riskier credit targets than large, State-backed businesses. As long as this bias stands, central government measures aimed at rescuing SMEs will forever miss their mark.