Chinese state banks cut deposit rates in bid to stimulate growth

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China’s five biggest state-run banks cut deposit rates on Friday as Beijing strengthened efforts to protect lenders’ profitability and provide a buffer against further economic headwinds amid flagging growth.

Chinese banks including the Industrial and Commercial Bank of China, China Construction Bank and Bank of China reduced one-year deposit rates to 1.45 per cent, and three-year rates to 1.95 per cent, according to the banks’ websites. The cuts, down 0.1 and 0.25 percentage points from September, respectively, were also made by the Agricultural Bank of China and Bank of Communications.

The co-ordinated round of deposit rate cuts on Friday, the third this year, will help reduce interest payment costs for China’s biggest banks, which are suffering historically low net interest margins, a critical gauge of profitability.

“Deposit rates cut[s] will immediately lower banks’ pressure in making some profit,” said Dan Wang, chief economist at Hang Seng Bank China. But she added that the impact on the broader economy would be “essentially a monetary contraction” because it would lower households’ interest income without boosting consumption.

The latest cuts brought deposit rates at Chinese banks to the lowest level since 1996, with one-year deposit rates at major banks down 0.2 percentage points in 2023, and two- to five-year rates down 0.5 to 0.6 per cent.

China’s banking sector has faced mounting pressure this year as the economy has suffered sluggish momentum and bad loans have piled up from property developers and local governments. Deflation worsened in November, with consumer prices down 0.5 per cent as demand flagged.

Chinese household deposits jumped 12 per cent to Rmb135.9tn ($19tn) in the first 11 months of 2023, according to data from the People’s Bank of China, as the weak economic outlook sapped appetite for investments, adding further cost pressure on banks and bolstering the incentive for deposit rate cuts.

The average net interest margins for all Chinese commercial banks is set to fall to 1.76 per cent in 2023, down 0.17 percentage points from 2022, according to S&P Global China Ratings, and is expected to tumble further in 2024.

Ting Lu, chief China economist at Nomura, said in a research note that the lower deposit rates should “lay the groundwork” for the PBoC to cut policy rates in January. Cuts “would signal Beijing has become increasingly concerned about the downward pressure on growth”, he wrote.

China declined to cut its prime one- and five-year benchmark rates this week, although it unleashed a net Rmb800bn in new liquidity last week, the most this year, as part of regular monetary operations to ensure ample funds for the banking system. The one-year loan prime rate, which underpins lending across the country, has been reduced twice this year.

Analysts anticipate further easing measures in 2024 to combat a prolonged slowdown in the debt-stricken property sector, which in recent months has shown signs of spilling over into the domestic investment industry after missed payments at investment group Zhongrong.

Policymakers have relaxed city-level restrictions on home purchases and aimed to support construction of unfinished apartments, many of which have been frozen following a wave of developer defaults over the past two years.

Beijing has moved with caution over fears of endangering the health of China’s $56tn banking sector, already hit by bad loans. The PBoC warned over the summer of the need for banks to make a “reasonable profit”.

The latest rate cuts marked “another sign of policymakers’ efforts to protect bank net interest margins following a sharp decline in asset yields in recent years”, said Richard Xu, an analyst at Morgan Stanley. 

Xu added that future rate cuts should be more symmetrical if economic growth slowed further, and that smaller regional banks would follow suit.

Shares in ICBC were flat on Friday after the rate cut announcement, while those of the other four banks rose.