Chinese banks slash deposit rates in bid to boost sluggish growth

China’s six biggest state-run banks cut deposit rates on Thursday as Beijing searched for ways to boost growth in the world’s second-largest economy amid doubts over the strength of its recovery.

Lenders including Industrial and Commercial Bank of China, China Construction Bank and Bank of China are now offering 2.45 per cent and 2.5 per cent on three- and five-year deposits, respectively, down 15 basis points from September, according to the banks’ websites. Similar cuts were made at Postal Savings Bank of China, Agricultural Bank of China and Bank of Communications.

The banks also cut the rate for on-demand deposits by 5 basis points to 0.2 per cent, the lowest level since 1996.

China’s economic recovery gained momentum in the first quarter after last year’s strict pandemic curbs, expanding 4.5 per cent, just trailing a cautious full-year target of 5 per cent.

But growth has failed to pick up pace in the second quarter amid weak property sales, flagging industrial output and consumption. The post-pandemic bounceback fell short of projections, while consumers appeared to sit on savings instead of spend them.

The co-ordinated cut to deposit rates, the second among Chinese state-owned banks in less than a year, will ease fundraising pressure on lenders and stabilise profitability, said CICC analyst Lin Yingqi. “It could boost consumption and reduce the amount of funds sitting idle in the monetary system.”

State-owned banks should benefit the most from falling deposit rates, which will boost returns on equity while making dividend yields on their shares more attractive, said Dexter Hsu, an analyst with Macquarie.

China has cut its benchmark prime loan rate, mortgage reference rates and reserve requirement ratio over the past few years to boost the money supply and lower borrowing costs for companies in an effort to support the pandemic-hit economy.

But average deposit rates remained unchanged, encouraging households and businesses to earn safe returns from deposits while their outlook on the economy remained gloomy.

CICC’s Lin said banks could save about Rmb120bn ($16.8bn) in funding costs following the Thursday cut and anticipated a deeper 20bp reduction in the deposit rate over the next 12-24 months.

Yet deposit rate cuts alone might not be enough to boost the economic recovery, analysts argued.

“Lowering deposit rates should help push some savings into consumption and investment, but it will need a combination of other policies to reach the goal,” said Gary Ng, senior economist at Natixis in Hong Kong.

“Consumers are still conservative due to slow disposable income growth and a diminished wealth effect, especially because of the still-poor outlook on real estate. It will need stronger stimulus in car sales and housing markets to reboot the economy in the short run.”

Policymakers need to do more to break the negative feedback loop of deflation, lacklustre consumption and rising unemployment, said Tan Yifei, founder of Jince Frontier, a Beijing-based consultancy. “It needs time and policies before the economy finds its footing and truly picks up.”