Low interest rates have done little to help citizens

China's consumer price index rose by 5.4 percent in 2011 from the previous year, the National Bureau of Statistics announced last Thursday, far above the government's target of 4 percent.

The People's Bank of China raised the benchmark one-year savings rate from 3 percent to 3.25 percent in April and to 3.50 percent in July.

Taken together, these figures mean the real rate of savings was negative, with savers likely to have seen their money shrink by between 1.9 percent and 2.4 percent last year.

Given that the lending benchmark rate has a positive relationship with the savings rate, the central bank has long kept the savings rate low with the aim of reducing borrowing costs for cash-strapped companies, especially small and medium-sized enterprises (SME).

This is aimed at reducing unemployment and encouraging lower prices for consumers, as SMEs account for over 80 percent of the overall jobs, and contribute over 60 percent of the country's GDP.

However, I would argue that these low interest rates have failed to result in easier access to credit for SMEs, while having an adverse effect on the savings of citizens.

Keeping a low savings rate has seen citizens' bank savings shrink. The big four State-owned banks saw an annual growth rate of 13 percent in new bank savings last year, down 7 percentage points from the previous year. Lian Ping, chief economist of the Bank of Communications, attributed this to the negative real return on savings.

Meanwhile, SMEs are failing to benefit from low lending rates, as commercial banks have little incentive to lend to them, and prefer to lend to State-owned enterprises (SOEs) and government-controlled special purpose entities. These latter two groups have attracted over 70 percent of overall bank lending over the last two years. This is because they are backed by the government and generally borrow large sums.

Another reason low interest rates fall flat in easing SME borrowing costs is that the central bank requires commercial banks to strictly adhere to its benchmark savings rate, but allows them substantial leeway in their lending rates. As such, the banks often charge higher interest rates to SMEs, which they view as being riskier.

Generally, commercial banks offer SMEs a real lending rate far higher than the benchmark; while they offer below-benchmark rates to SOEs and local governments.

What's more, SMEs have to pay extra borrowing costs from which entities that have secured government support are exempt. For example, SMEs have to pay more for the credit guarantee that is required before they can get a bank loan. Banks also tend to lend to SMEs via bills of exchange, which SMEs have to pay to cash in.