China Tells Largest Banks To Cut Deposit Rates In Bid To Boost Growth

With China’s post-covid recovery stalling and the economy stagnating, many said it was only a matter of time before China engages in fresh easing – especially when it comes to propping up its all important property market – on Tuesday, Chinese authorities asked the nation’s biggest banks to lower their deposit rates for at least the second time in less than a year, Bloomberg reported citing sources familiar, marking an escalated effort to boost the world’s second-largest economy.

State-owned bank giants such as Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and Bank of Communications Co. were told last week to cut rates on a range of products, including on demand deposits by 5 basis points and three-year and five-year time deposits by at least 10 basis points, a request which was communicated through the central bank’s interest rate self-disciplinary mechanism.

As Bloomberg notes, banks are assessing the request and may adjust rates as early as this week, adding that the move isn’t mandatory although in China if a state-owned bank doesn’t follow the state’s guidance, it is usually not a great look. Big lenders currently offer an annualized rate of 0.25% demand deposits, and 2.6% and 2.65%, respectively, on three-year, five-year time deposits.

The guidance, which follows similar rate reductions in September last year, will help alleviate pressure on lenders as they strive to balance shrinking margins and government directives to beef up lending support to the economy.

Once the deposit rates cut take effect, it would lower costs of banks, enabling them to reduce lending rates over time. That, in turn, would make it more attractive for consumers and businesses to borrow. Lower deposit rates would also make it less attractive for consumers to park their cash at banks.

However, contrary to expectations of a major stimulus, the latest measure will likely have little impact on the economy and is just another band aid to keep the economy from slumping.

“China’s further monetary easing would have limited scope, given the Sino-US monetary policy split and the less effective monetary transmission,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “Cutting deposit rates could provide incentive and capacity to banks for more credit support. It also means reduced chance of policy rate cuts in the near term.”

China’s 10-year government bond yield slipped 1 basis point to 2.70% after the news. The onshore yuan weakened as much as 0.3%, touching a low of 7.1253 per dollar.

Beijing has rolled out a raft of half-measures – because with 152 trillion in government debt and soaring, Beijing never really dleveraged…

Breakdown of China government debt, all 152TN yuan of it. pic.twitter.com/H5C2Jw5U71

— zerohedge (@zerohedge) June 5, 2023

… to prop up the economy after a series of crackdowns on multiple industries and lengthy lockdowns due to Covid Zero. The authorities are seeking to boost lending to bolster a recovery after recent data showed a slowdown.

After spiking in the first quarter, credit and new loans weakened sharply in April as consumers and businesses curbed their borrowing. Households are saving more and paying down their mortgages, rather than taking on more debt, while businesses are faced with falling demand and declining profits.

Big lenders including ICBC and Bank of China last trimmed their benchmark deposit rates across the board in September for the first time since 2015. Smaller peers followed suit in April with rate reductions on some tenors.