In recent times, several banks in China have experienced the phenomenon of short- and medium-term deposit rates inverting: the interest for a one-year deposit is higher than that for a two-year deposit.
According to a report by “Yicai” on February 9, a rural commercial bank in Shanxi recently raised its one-year deposit rate to 1.75%, while the two-year fixed deposit rate (1.45%) remained unchanged, causing a rare inversion in deposit rates with a gap of approximately 30 basis points (BP) between them.
Recently, a number of small and medium-sized banks such as Huairen Rural Commercial Bank, Shuozhou Rural Commercial Bank, Lingchuan County Rural Credit Union, and Mizuho Bank have seen their one-year and two-year deposit rates holding steady or inverting.
Starting from January 22, Shuozhou Rural Commercial Bank raised some of its fixed-term deposit rates before the Chinese New Year. Previously, the bank’s rates for one-year, two-year, three-year, and five-year “fixed-term deposits” were 1.4%, 1.45%, 1.9%, and 1.9% respectively. After the adjustment, the one-year rate increased by 35 basis points to 1.75%, the three-year rate increased by 25 basis points to 2.15%, resulting in an inversion between the three-year and five-year rates, as well as between the one-year and two-year rates.
On the same day, Huairen Rural Commercial Bank also adjusted its deposit rates, with the new rates for one-year and two-year fixed deposits at 1.75% and 1.45% respectively, and for three-year and five-year fixed deposits at 2.15% and 1.9%, showing an inversion in rates.
Furthermore, on February 1, Guangdong Nanao Rural Commercial Bank announced adjustments to the listed interest rates for RMB deposits. After the adjustment, both the one-year and two-year fixed-term deposit rates were set at 1.6%, remaining unchanged.
The report indicates that unlike the previous inversions seen in the three-year and five-year deposit rates, the rate inversion has now spread to short- and medium-term deposits.
Industry analysts suggest that the rate inversion may be influenced by multiple factors: on one hand, some rural commercial banks are increasing their one-year deposit rates to attract more deposits; on the other hand, the industry anticipates a continued decline in deposit rates, leading banks to proactively adjust their liabilities structures and refrain from absorbing more long-term funds.
However, many industry insiders believe that the one-year and two-year deposit rate inversion is not a common phenomenon but rather a short-term strategy adopted by specific banks based on their own liabilities structure.
Dong Ximiao, chief researcher at Zhaolian Research Institute and deputy director of the Shanghai Laboratory of Financial Development and Regulation, suggests that the recent deposit rate inversion reflects banks’ judgments on the trend of interest rates. Looking from a medium to long-term perspective, banks expect deposit rates to continue falling, prompting them to reduce the accumulation of medium- and long-term deposits that currently offer higher rates. Overall, the number of banks experiencing rate inversions and their corresponding deposit amounts are relatively limited, and most premature withdrawals of fixed-term deposits are not cost-effective, thus the actual impact on banks’ deposit sizes is considered to be quite limited.