Industrial and Commercial Bank of China (ICBC), Agricultural
Bank of China, China Construction Bank, Bank of China, and Bank of
Communications have all reduced deposit rates by 5 to 20 basis points, as per
official statements published on their respective websites.
The recent deposit rate cuts by Chinese banks mark a
significant shift in the financial landscape, with three reductions already
implemented in 2023. This follows a similar move in late 2022, which was the
first of its kind since 2015. It is anticipated that other major state-owned
lenders will follow suit, further reducing deposit rates.
These adjustments come in response to a narrowing of
commercial banks’ net interest margins, which reached a record low of 1.54% at
the end of March this year.
China unexpectedly reduced key short and long-term interest
rates on Monday to stimulate growth in the struggling economy.
This was followed by another unexpected move on Thursday
when the central bank conducted an unscheduled lending operation at
significantly lower rates, as authorities aimed to support the faltering
economy with additional monetary stimulus.
Lowering deposit rates could potentially mitigate funding
expenses for financial institutions during this period of economic uncertainty
characterized by a property crisis, subdued loan demand, and historically low
interest margins. This measure could provide relief and enable banks to
continue supporting economic growth effectively.
"The cuts to deposit rates will enable banks to have
more room to implement lending rate cuts, otherwise banks will lack motivation
to do that given their enormous profit margin pressure," said Nie Wen, an
economist at Shanghai Hwabao Trust.
It Is anticipated that smaller banks will emulate this
action, albeit with more moderate reductions in deposit rates, due to the
intense competition for customer acquisition, as per Nie’s analysis.
ICBC has reduced its demand deposit rate by 5 basis points
to 0.15% and its one-year deposit rate by 10 basis points to 1.35%. The bank
has also cut rates on deposits of two years or more by 20 basis points to a
range of 1.45% to 1.8%.
Gary Ng, Asia-Pacific senior economist at Natixis,
anticipates that China will experience additional benchmark lending rate
reductions of 15 basis points during the current year if there is no
improvement in the nation’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."
The Financial News, a media outlet supported by the Chinese
central bank, mentioned on Thursday that reducing deposit rates would stimulate
corporate investment and household spending.
According to the outlet, this move would facilitate better
asset allocation, increase the influx of funds into the capital market,
contribute to the stabilization and growth of the stock market, and reinforce
the ongoing trend of economic recovery and enhancement.
Nevertheless, analysts expressed doubts that the recent cuts
in deposit rates would suffice to shift savings towards consumption and
investment, citing consumers' bleak income outlook and deflationary influences.
"It will either take greater rate cuts or a big
improvement in sentiment to drive demand," said Ng.
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