Agricultural Bank of China Co., Ltd. Guangdong Branch (left) stands near high-rise construction projects in Zhujiang New Town, Guangzhou, Guangdong Province, China.
Brent Lewin | Bloomberg | Getty Images
China’s five major state-owned banks cut deposit rates on Thursday to soften the blow to their already record-low profit margins after an unexpected cut this week. loan benchmark to boost stagnant economic growth.
Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, China Construction Bank, Bank of China and Bank of Communications It will cut deposit rates by 5 to 20 basis points, according to a statement on its website.
This is the first time since December last year that a Chinese bank has significantly lowered its deposit interest rate. There were three interest rate cuts in 2023.
More banks may follow the lead of large state-owned banks in lowering deposit rates.
The rate cut comes as commercial banks’ net interest margins – a key measure of profitability – narrowed to a record low of 1.54% at the end of March this year.
China surprises markets cutting Key short-term and long-term interest rates were announced on Monday in a bid to boost growth in the struggling economy.
That was followed by another surprise on Thursday, when the central bank conducted unplanned lending operations at extremely low interest rates as authorities tried to prop up a faltering economy with more monetary stimulus.
Lower deposit rates will help lower funding costs for banks as they face pressure to support economic growth amid the housing crisis, weak loan demand and record low interest rate spreads.
Nie Wen, an economist at Shanghai Huabao Trust, said: “The reduction in deposit interest rates will give banks more room to implement reductions in loan interest rates, otherwise banks will lack motivation because of their huge profit pressure.”
Amid fierce competition for customers, smaller banks may follow suit, but with modest cuts in deposits, Nie said.
ICBC lowered its current deposit interest rate by 5 basis points to 0.15% and its one-year deposit interest rate by 10 basis points to 1.35%. The bank lowered interest rates on deposits of two years and above by 20 basis points to 1.45% to 1.8%.
Gary Ng, senior economist at Natixis Asia Pacific, predicts that China will further cut its benchmark lending rate by 15 basis points this year if China’s economic data does not improve.
“Chinese banks are facing completely different difficulties now than in the past,” Wu said. “Any changes in lending rates must be accompanied by reductions in deposit rates and bank funding costs.”
Financial News, a media outlet backed by China’s central bank, said on Thursday that lowering deposit rates would encourage corporate investment and household consumption.
“Promoting the optimization of asset allocation and enhancing the momentum of capital inflows into the capital market will be conducive to stabilizing and boosting the stock market…consolidating the upward trend of economic recovery.”
However, analysts said the latest deposit rate cut may not be enough to redirect savings toward consumption and investment due to weak consumer income prospects and deflationary pressures.
“Either a deeper rate cut is needed, or sentiment needs to improve significantly to drive demand,” Wu said.
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