Financial China

Inflection point seen in monetary policy

  • Published 19 May 2011

The heavy reliance of the central bank on hiking bank required reserve ratios may be in its final phase, setting up new gambits from the PBoC's playbook.

The SOEs vs the SMEsWhile state-owned enterprises (SOEs) have found it fairly easy to obtain credit from China’s state-owned banking system this year, a vast number of small and medium enterprises (SMEs) – which are mostly privately-owned – have struggled, often having to turn to the shadow banking system to raise financing at punitive rates. This sharp imbalance in treatment, which we have been pointing out since February (CC Feb 3 2011, Update Alert), may not be sustainable or desirable to Beijing for much longer as signs of real SME strain, including bankruptcies (CC May 5 2011, Big Call), are proliferating. The situation is particularly galling for SMEs because it is the state-owned enterprises that are benefiting from their misfortunes; large amounts of bank lending to state companies has been re-lent out of the back door by those companies to shadowy Trusts, which then lend it on to the SMEs (CC May 5 2011, Financial China) at rates that are typically 4pp or 5pp higher than official lending rates.

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