In an effort to alleviate the net interest margin pressure on the banking industry and stimulate consumption, Chinese banks announced a comprehensive reduction in deposit rates on Tuesday. The one-year and demand deposit rates of state-owned major banks were lowered to 0.95% and 0.05% respectively. Experts believe that a sluggish real estate market, dim job prospects, and tariff uncertainties have all contributed to market sentiment pressure, resulting in low consumer and business confidence. The rate cut may have limited effectiveness in boosting the economy.
On Tuesday, May 20th, state-owned banks including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank of China all announced reductions in the Renminbi deposit benchmark rates. The demand deposit rate was lowered by 5 basis points, while rates for 3-month, 6-month, 1-year, and 2-year term deposits were reduced by 15 basis points, and rates for 3-year and 5-year term deposits were cut by 25 basis points.
After the adjustment, the one-year, two-year, three-year, and five-year term deposit rates of the six major state-owned banks are set at 0.95%, 1.05%, 1.25%, and 1.3% respectively. Except for the one-year term deposit rate of 0.98%, Postal Savings Bank of China’s rates for two-year, three-year, and five-year term deposits are consistent with the other five major banks.
According to a report by Reuters, Xing Zhaopeng, a senior China strategist at ANZ Bank, stated that the purpose of the rate cut is to restore the net interest margin of commercial banks and prepare for future rate cuts. He predicted that the People’s Bank of China will cut rates again by the end of July.
Data from the China Banking Regulatory Commission showed that in the first quarter of this year, the net interest margin of commercial banks in the country further narrowed to 1.43%, a decrease of 9 basis points from the fourth quarter of last year. The net interest margin of state-owned banks was 1.33%, and that of joint-stock banks was 1.56%, each dropping by 11 and 5 basis points respectively from the fourth quarter of 2024.
Following this round of rate cuts, the demand deposit rate at the six major state-owned banks is now at 0.05%, a step away from zero interest! The one-year term deposit rate is 0.95%.
Blogger “老乾體v” pointed out that such low rates have never been seen since the establishment of the People’s Republic of China. This indicates that the current situation is far more severe than the National Bureau of Statistics claiming a first-quarter GDP growth of 5.4%. With the deposit rate entering the “1% era” last July, it has now been broken in less than a year.
From May 20th to 21st, national joint-stock banks such as China Merchants Bank, Everbright Bank, Ping An Bank, CITIC Bank, Industrial Bank, Pudong Development Bank, Minsheng Bank, GF Securities, and Huaxia Bank quickly followed suit by adjusting their deposit rates.
Analysts believe that after large banks adjust their deposit rates, small and medium-sized banks will follow suit based on their own conditions and market competition, possibly ushering in an era of “1% deposit rates” across the board.
An analyst at China International Finance Co., Ltd. (referred to as CICC) stated in a report that due to persistently weak loan demand and fierce competition among banks to attract customers with low-interest loans, the net interest margin is expected to further decline by 10 to 15 basis points this year.
On Tuesday, May 20th, the People’s Bank of China reduced both the one-year and five-year Loan Prime Rates (LPR) by 10 basis points, from 3.1% to 3.0% and from 3.6% to 3.5% respectively.
On May 7th, the People’s Bank of China lowered the 7-day reverse repo rate (usually used as a benchmark for LPR adjustments) from 1.50% to 1.40%, while also reducing the reserve requirement ratio by 0.5 percentage points to 7.5%.
Earlier this month, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission jointly launched a “basket” of financial policies, totaling 10 measures, including a 0.5 percentage point reduction in the reserve requirement ratio expected to provide approximately 1 trillion yuan of long-term liquidity to the market.
LPR (Loan Prime Rate) is the interest rate quoted by banks based on their best clients’ executed loan rates, formed by adding points to the open market operation rate.
This move marks another step by the Communist Party to support the economy through loose monetary policy, following the 10 basis point reduction in the one-year and five-year LPR in July 2024 and a further 25 basis point cut in October of the same year.
An analysis by Bloomberg suggests that lowering interest rates will reduce borrowing costs for businesses and households, providing more incentive for them to increase investments or spending. However, with a sluggish real estate market, dim employment prospects, and tariff uncertainties affecting market sentiment and causing low consumer and business confidence, the impact of rate cuts may be limited.
According to CNBC, relying solely on moderate rate cuts may not significantly boost loan demand and revive the overall economy. They indicate that the burden of supporting demand mainly lies in fiscal policy.
In April, China’s total retail sales of consumer goods reached 3.7174 trillion yuan, a year-on-year increase of 5.1%, lower than the 5.9% growth in March and below the expert’s forecast of 5.8%.
Chinese affairs expert Wang He previously told NTD that the combination of weak consumption and continuous increases in savings is an economic deadlock for China. He mentioned that the authorities are aware that citizens are not spending but saving aggressively, and in order to drive money out of the banks for consumption, they keep reducing savings interest rates.
“Bank interest rates have now almost reached their limit, with very little room left for further cuts. In this situation, despite continuous rate cuts, people are still not spending, leading to a significant increase in savings. This has become a serious problem and a deadlock in China’s economic policy.”
In a report released this week, Lu Ting, chief economist at Nomura Securities, stated, “We still believe that achieving the target of ‘around 5%’ growth will face significant challenges unless the Chinese government implements large-scale stimulus measures.”