Several Chinese lenders cut interest rates on a range of yuan deposits from Monday, following their larger peers in a coordinated move to ease pressure on profit margins. The deposit rate cuts follow a similar move by China’s most significant state lenders on Friday and mark the second industry-wide cut within a year, with previous action taken in September. Analysts said the move will help banks lower financing costs and boost their ability to support the economy.
The move comes as China’s economy loses momentum amid slowing domestic demand, a property market slump, and uncertainty about global economic growth. That has squeezed bank profits, with most State-owned commercial banks reporting a drop in pre-provision operating profit last quarter, according to a recent CreditSights report. Rising expenses have also eroded The banks’ margins, including funds set aside to cover bad loans.
A cut in deposit rates would push savings into consumption and investment, which could help ease margin pressure and support the broader economy, CreditSights’ Dong said. He added that it would also help promote a further reduction in lending rates and allow the banks to maintain stable net interest margins (NIM). The cuts by large commercial banks are expected to drive down the cost of debt for SMEs, which have complained about rising financing costs and have been cautious about borrowing in recent months, Dong said. He added that city and rural commercial banks might differ in the pace of deposit rate cuts because they have different development strategies, debt capacity, and business structures.
Agricultural Bank of China Ltd, Industrial and Commercial Bank of China Ltd, Bank of China Ltd, and China Construction Bank Corp, also known as the Big Four, cut rates on demand deposits by five basis points and three-year and five-year time deposits by 15 basis points, their websites showed. They also lowered rates on some fixed-rate deposits.
The Big Four account for about 80% of the country’s total commercial banking assets and are often seen as a bellwether of the financial sector. Several smaller banks also have announced deposit rate cuts. The deposit rate cuts by the big four will help lower their costs and enable them to reduce lending rates, analysts say.
Analysts say that the central bank’s decision to bolster banks’ profitability is part of an effort to avoid a sharp economic downturn, which would weigh on exports and consumer spending. It has yet to raise rates this year as it tries to manage the yuan’s decline against the dollar, driven by widening yield differentials with the United States. The yuan has dropped 3% against the greenback this year as the Fed tightens and China accommodates its policy. The yuan’s slide has added concerns about the nation’s debt load and financial risks. The PBOC has yet to indicate whether it will cut the critical reserve requirement ratio soon to provide additional monetary stimulus. The central bank hasn’t directly set bank rates since 2005 but retains substantial sway through its market-based mechanism that includes banks big and small.
