The People's Bank of China, China's central bank, slashed benchmark deposit and loan interest rates by 25 basis points from March 1. The cut brought the one-year deposit rate to 2.5 percent, and the lending rate to 5.35 percent. The central bank also decided to adjust the upper limit of the floating band of deposit rates to 1.3 times the benchmark from the previous 1.2 times, a further step towards liberalizing the bank rates mechanism.

The symmetrical rate cuts were hailed as a "gift pack" to the Chinese economy from the central bank during the Spring Festival. The cuts, although much anticipated, came sooner than the market prediction as it shows the central bank's worry about the current economy.

By cutting interest rates, the central bank hoped to reduce the business sector's financing cost. Recently, the money supply has been slowly. As of the end of last December, the M2 supply in China grew 12.2 percent year on year. Dropping for four months in a row, this growth rate was 1.4 percentage points lower than in 2013, and 8.85 percentage points lower than the 21.05-percent average rate for the period between 1986 and 2013. In the real economy, the reduced M2 supply means more financing difficulties for middle and small businesses.

On the other hand, the central bank slashed bank rates in a bid to stimulate the economy while maintaining its prudent monetary policy when CPI was curbed at a lower level. In January, the CPI only grew 0.8 percent year on year, the lowest record since November 2009.

The Chinese economy is facing strong downward pressure. The January trade data also showed a retreating surplus. The slump in exports was a sign that the yuan's exchange rate was still overvalued, while the sharp decline in imports reflected sluggish domestic demand.

Questions still remain about whether the symmetrical interest cuts will benefit the real economy, evident in many scholars' pessimism that the rate cuts will only have a "limited effect" on the real economy.

Such a worry is not entirely baseless. Many small businesses in China are suffering from financing troubles, and they are in an inferior position when applying for bank loans. Conversely, banks are increasingly cautious in issuing loans out of fear of non-performing loans, among other risks.

Recent regulations all seek to tighten up banks' financial management, which in the long run, are beneficial in limiting banks' reckless expansion, preventing risks and ensuring stable operation. But they raise banks' operation costs and reducing their intention to finance small and medium-sized enterprises.

At the same time, however, state-owned enterprises (SOEs) do not have such problems. Their capital is from the taxpayers, they have the government to bail them out when necessary, and they are the banks' prime customers.

Social capital can stimulate economic growth only when it enters the 'blood vessel' of the real economy. Similarly, the influence of interest rate cut should be felt by the real economy before curbing deflation.

To make that happen, financial institutions should keep the bigger picture in mind, in that they cannot continue to discriminate against small businesses. Meanwhile, the central bank and other regulators should ease their grip on commercial banks, while allowing capital to flow into the real economy so as to ultimately solve the current economic difficulties.

The writer is a financial commentator.

The article was translated by Chen Boyuan. Its unabridged version was published in Chinese.

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