New deposit rate cuts herald cheaper loans

Reductions most substantial since 2016; may incentivize consumption

China's biggest banks cut interest rates on deposits on Friday, which analysts said may have marked the biggest cut since 2016 and will likely help create room for benchmark lending rates to decline early next year.

China's five largest state-owned commercial banks and China Merchants Bank, a major joint-stock commercial bank, reduced deposit rates across the board on Friday, with the interest rate on three-month, six-month, and one-year time deposits down 10 basis points to 1.15 percent, 1.35 percent and 1.45 percent, respectively.

The banks, according to their statements on official websites, also cut the interest rate on two-year time deposits by 20 basis points to 1.65 percent, three-year deposits by 25 basis points to 1.95 percent and five-year deposits by 25 basis points to 2 percent.

The five largest state-owned banks are Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications.

Another major state-owned bank, Postal Savings Bank of China, was yet to announce the rate cuts as of Friday afternoon but analysts expect it to do so soon, while small and medium-sized banks may follow suit later.

Friday's adjustment was this year's third reduction in deposit rates, following previous cuts in June and September.

A report of China International Capital Corp Ltd highlighted the latest reduction as the most substantial since 2016, featuring an uncommon cut of up to 10 basis points for both three-month and six-month deposit rates.

While the move will incentivize households to save less and consume more, experts said the most significant aspect of Friday's move is that it eases commercial banks' profitability pressures and serves the policy focus of reducing financing costs of the real economy to bolster economic recovery.

The Central Economic Work Conference held earlier this month has called for efforts to promote a moderate decline in the overall cost of social financing while keeping it generally stable.

Lou Feipeng, a researcher at Postal Savings Bank of China, said the reduction in deposit rates is necessary for further easing the real economy's financing costs as banks' net interest margin — the difference between the interest rate banks charge on loans and the rate they pay out to depositors — is already low and leaves limited room for lending rates to decline.

"Commercial banks' profit has decreased amid declining net interest margin, and so has their ability to supplement capital through retained earnings. Banks need capital when issuing loans. Therefore, reducing deposit rates helps stabilize their interest margin and hence improves their ability to lend to and support the real economy."

As lending rates dropped in China, Chinese commercial banks' net interest margin decreased to 1.73 percent on average as of the end of the third quarter, the lowest on record, according to Huafu Securities.

After decreasing in June and August by a total of 20 basis points, the country's one-year loan prime rate — a market-oriented benchmark lending rate — remained steady at 3.45 percent on Wednesday.

Zhou Maohua, a researcher at China Everbright Bank, said he expects a reduction in LPRs is in the offing following Friday's deposit rate cuts, but more policy moves from the People's Bank of China, the country's central bank, are still necessary to push financing costs down.

In the China Financial Stability Report 2023 published on Friday, the PBOC said it will focus on creating a favorable monetary and financial environment and satisfying effective financing demand of the real economy while strengthening financial stability by promoting the adoption of the financial stability law at an early date.