July 25 2024: On Thursday, five of China’s major state-owned banks cut deposit rates to alleviate pressure on their record-low margins following this week’s unexpected reduction in lending benchmarks aimed at boosting the sluggish economy.
Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (OTC
), China Construction Bank (OTC
), Bank of China, and Bank of Communications reduced deposit rates by 5 to 20 basis points, as per statements on their websites.
This marks the first broad reduction in deposit rates by Chinese banks since December last year. There were three cuts in 2023, following similar reductions in late 2022, which were the first since 2015.
It is anticipated that more banks will follow the lead of the major state-owned lenders with similar deposit rate cuts.
These cuts come as commercial banks’ net interest margins—a key profitability measure—dropped to a record low of 1.54% by the end of March this year.
China surprised markets by cutting major short and long-term interest rates on Monday to stimulate growth in its struggling economy. This was followed by an unscheduled lending operation at significantly lower rates on Thursday, as authorities sought to support the faltering economy with increased monetary stimulus.
Lowering deposit rates helps reduce funding costs for banks, which are currently under pressure to support economic growth amid a property crisis, weak loan demand, and record-low interest margins.
“The cuts to deposit rates will enable banks to have more room to implement lending rate cuts. Otherwise, banks will lack the motivation to do that given their enormous profit margin pressure,” said Nie Wen, an economist at Shanghai Hwabao Trust. Smaller banks are likely to follow suit with milder deposit cuts due to intense competition for customers, according to Nie.
ICBC reduced its demand deposit rate by five basis points to 0.15% and the one-year deposit rate by 10 basis points to 1.35%. Rates on deposits of two years or more were cut by the bank by 20 basis points to between 1.45% and 1.8%.
Gary Ng, Asia-Pacific senior economist at Natixis, expects further benchmark lending rate cuts in China by 15 basis points this year if there is no improvement in the country’s economic data.
“Chinese banks face quite a different dilemma nowadays than in the past,” said Ng. “Any change in lending rates must come with lower deposit rates and bank funding costs.”
Lowering deposit rates will encourage corporate investment and household consumption, according to the Chinese central bank-backed media outlet Financial News.
“It promotes the optimization of asset allocation, enhances the momentum of funds flowing into the capital market, aids in stabilizing and boosting the stock market…and consolidates the trend of economic recovery and improvement,” the outlet stated.
Analysts, however, expressed skepticism, noting that the latest deposit rate cuts might not be sufficient to redirect savings into consumption and investment due to weak income prospects and deflationary pressures among consumers.
“It will either take greater rate cuts or a big improvement in sentiment to drive demand,” Ng added.
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