By Lingling Wei
BEIJING--China cut interest rates for the third time in six
months amid a worse-than-expected economic slowdown, as authorities
scramble to ease the heavy debt burdens of companies and
governments.
The People's Bank of China said Sunday it would shave a quarter
of a percentage point off benchmark lending and deposit rates,
effective Monday.
The move comes as senior Chinese officials are growing more
fearful that the mountain of debt from the rapid expansion of
credit over the past few years is weighing on efforts to pick up
the world's second-largest economy.
In one of the starkest official warnings about China's growing
debt woes, the PBOC said in its monetary-policy report Friday that
the "rising debt size is forcing China to use a lot of resources in
repaying and rolling over debt" while limiting the room for further
fiscal expansion. The central bank is also considering a
credit-easing tool that will allow local governments to restructure
debts, according to people familiar with the matter.
Meanwhile, easing measures taken by the central bank--including
two interest-rate reductions since November--have largely failed to
spur new-loan demand.
Instead, the actions have triggered a strong run-up in China's
stock markets in recent months, which has helped the authorities to
keep funds from flowing outside China but also led to concerns over
speculative trading. Chinese shares tumbled last week as regulators
moved tolimit investors' ability to buy stocks with borrowed
funds.
People with knowledge of the discussions say China's policy
makers are increasingly concerned that Beijing may fall short of
reaching its already-lowered expectations for growth--set at about
7% for this year, the lowest level in about a quarter-century. In a
meeting led by President Xi Jinping a week ago, the Politburo--the
ruling Communist Party's top decision-making body --stressed the
need to "more efficiently channel monetary policy to support the
real economy."
The latest rate cut came after China reported disappointing
trade data on Friday and inflation data on Saturday that both
highlighted weak domestic demand and subdued manufacturing
activity. The real-estate market, which together with construction
and other related industries accounts for a quarter of China's GDP,
remains sluggish, casting one of the biggest shadows over the
overall economy.
In addition, exports are expected to stay weak because of
slowing demand overseas and China's effort to keep the yuan from
depreciating in value.
At the same time, bad loans are rising in China's vast banking
system. According to the China Banking Regulatory Commission,
nonperforming loans surged 140 billion yuan ($22.6 billion) from
the beginning of the year to 982.5 billion yuan as of March 31, the
biggest quarterly jump in more than a decade.
Dud loans made up 1.39% of all loans as of the end of March, up
0.14 percentage point from the end of 2014 and representing the
highest level in five years. The rise of bad loans is crimping
banks' profits at a time when they are being called upon to make
credit more accessible. China's top five state-owned banks, for
instance, saw their first-quarter profit grow less than 2%,
compared with the double-digit growth rate typically seen in
previous years.
The rate cut lowered by a quarter-percentage point both the
benchmark one-year loan rate, to 5.1%, and the one-year deposit
rate, to 2.25%. In a statement Sunday, the central bank singled out
low inflation as a trigger for the move, saying real interest
rates, adjusted for price changes, remain at historically high
levels. In another step toward freeing up banks' deposit rates, the
PBOC allowed Chinese banks greater flexibility in deciding how much
they pay depositors. With the latest move, banks can raise one-year
deposit rates to as high as 3.375%.
Of particular concern to officials at the PBOC and other
regulators is the potential for credit to freeze up as a result of
mounting defaults, Chinese officials and economists say. Already,
based on estimates by economists at Royal Bank of Scotland, more
than $300 billion in funds has left China's shores over the past
six months, partly from the strength of the U.S. dollar and partly
from ebbing confidence in the Chinese economy. More money could
flow out if defaults keep rising, drying up funds for lending.
As a result, Chinese authorities are trying to come up with
different ways to help alleviate borrowers' debt-repayment burdens,
even though that can mean taking a direct government role in
deciding winners and losers.
In Guangrao, an industrial county in eastern China's Shandong
province, tire maker Deruibao Tire Co. has become a key target of a
government-led rescue effort, according to a government spokesman
and others involved in the process. Like other Chinese companies,
Deruibao expanded rapidly soon after Beijing launched a
massivestimulus package in late 2008. It took on debt, mostly bank
loans, to build new plants, according to local officials and
bankers familiar with the company's finances. All had gone well
until last year, when plunging sales both at home and abroad led
its bank creditors to call in loans.
Earlier this year, the company went to the government of
Guangrao for help, according to a spokesman for the local
government. Local officials then tried to get its banks to extend
credit to the company, according to local officials and bankers
with knowledge of the negotiations. Two local banks obeyed the
order, these people said, but other national banks balked. Now,
according to the spokesman for the Guangrao government, the county
still is seeking to help prevent the company from filing for
bankruptcy by "actively coordinating with all parties
involved."
The main reason, according to Guangrao officials: Deruibao also
guaranteed loans taken out by other companies, and a bankruptcy
filing could trigger a chain of defaults.
"The regulators are on the lookout for any signs of systemic
risks," a Guangrao official involved in Deruibao's affairs said.
Representatives at the company declined to comment.
In addition to corporate debt, Chinese leaders have also
targeted the ballooning debts of various levels of government. But
a debt-for-bond swap plan aimed at giving provinces and cities some
breathing room has hit snags, as many of China's commercial banks
are balking at purchasing the new bonds.
That is prompting the PBOC to speed up consideration of a
strategy similar to the one used in Europe's bailouts, officials
with knowledge of the matter have said.
Under the plan, the central bank would let commercial banks swap
the local-government bonds they purchase for loans from the central
bank, with the aim of keeping the debt-restructuring effort on
track without causing a painful credit crunch.
Many economists say the sharp deceleration in China's economic
growth and the need to resolve its debt issues could lead the PBOC
to launch more easing measures in the coming months. The central
bank, meanwhile, has maintained caution about stepping on the gas
pedal too hard. In the monetary-policy report released Friday, the
central bank said it would continue to adopt various tools to
ensure adequate liquidity in China's financial system while
"preventing excessive easing."
Write to Lingling Wei at lingling.wei@wsj.com
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